The price escalation in the NEM in recent years has been well documented. Closure of ‘low-cost’ coal generation (particularly Hazelwood) has seen average prices in the NEM increase significantly as the overall supply/ demand balance tightens. Some of this tightness has been alleviated by the significant development of variable renewable energy, however, with this comes new challenges. The changing generation mix is resulting in price outcomes that are becoming increasingly variable over the day. In this Issue, we investigate the growing opportunities for price arbitrage – particularly at the daily resolution.
Figure 1 shows how the daily price spread has changed over time. Note that the price spread calculation reflects the difference between 90th and 10th percentile prices over the day to control for transient price spikes/ falls that can overstate daily price spreads over the year.
There is a strong signal for flexible operations to utilise the surplus of supply (such as in the middle of the day) for monetisation during peak periods. This is most visible in Victoria and South Australia where price spreads have increased by more than $100/MWh on average.
Storage technologies (such as pumped hydro and batteries) are best placed to maximise price arbitrage through buying lower-priced energy (to consume/ store) and selling during higher-priced periods (generation). The timeframe over which arbitrage is valued depends on an asset’s storage capacity.
Pumped hydro stations typically have large reservoirs enabling them to capture the seasonal changes in prices more effectively than shorter duration technologies like batteries.
Put differently, pumped hydro can charge more in lower priced months (like the shoulder seasons) and discharge in the peak months (like summer) when prices are generally elevated.
For batteries, with comparatively shorter duration storage, there is more of an opportunity to arbitrage daily to maintain sufficient state of charge – a function of co-optimising across frequency (FCAS) markets in addition to energy.
ASX futures are showing strong price backwardation particularly in Victoria where the Cal2020 price is $94/MWh and Cal2022 is $66/MWh. While expectations are that average prices will be lower, the variability in price will continue and could become more spread.
Price trends in the coming decade will be broken down into different blocks depending on timings of new entrants (including new generators, storage and interconnectors), and exit of major existing coal assets. These timings will have profound effects on arbitrage opportunities both within the day and through the seasons.
These are trends we are already witnessing in our modelling underpinning our Benchmark Price Curve to be launched later this month – more on that later