Pumped storage: Silent winners in the energy transition so far?

Following on from last week’s Chart of the Week (CoTW) discussing the price-setter role renewable technologies are increasingly playing in the NEM, this week’s CoTW examines the impact these pricing dynamics are having on pumped storage operations across the market.

To run, storage technologies – pumped hydro/ batteries – typically exploit arbitrage opportunity pockets in the market (price spreads); acting as load when prices are low (pumping water or storing energy) and dispatching when prices are favourably higher. Given the seemingly suppressive influence renewable technologies are progressively having on prices across the NEM (especially in the middle of the day), this CoTW investigates two key questions: is this new pricing reality reflected in load/ generation price spreads for pumped storage? How is this changing the dispatch commitments of pumped storage operations in the NEM?

To answer the first question, we look at the pumped/ dispatch volumes for each pumped storage unit and their respective captured prices across the financial year 2018-19 (Fig. 1). Evidently, each of these systems pumped over 75% of their total volumes below $75/MWh whilst dispatching a large majority of their volumes above $100/MWh. This average minimum spread of ~$25 – 50/MWh tells an interesting narrative when compared with financial year 2017-18 outcomes. Compared to 2017-18, Wivenhoe, on average saw 8pp increase in pumped volumes under $50/MWh whilst also dispatching on average 36pp more volumes over $100/MWh in the 2018-19 financial year. This is a consistent trend observed across all pumped storage systems suggesting increasing price spreads and commercial arbitrage opportunities for storage and flexible assets in the NEM.

Interestingly, Wivenhoe has also been observed to pump during the day and not at night, taking advantage of excess solar output and low prices prior to dispatching in the early evening/morning peak; an outcome many years ago most would have considered strange. This increased opportunity for commercial returns is seeing pumped storage systems run harder than historically. In 2018-19, Wivenhoe generated 217% more than its output in the preceding financial year. Again, this is seen across the board with pumped storage systems in the NEM. Perhaps in conjunction with batteries – whose revenue streams we covered in CoTW Issue 6 – we are witnessing existing storage players being the first-off-the-ranks to respond to market signals for flexibility as renewables continue to increase their share of the generation mix.
Going forward, storage technologies (pumped hydro/ batteries) have key roles to play in the NEM – least of which is energy shifting, especially in the presence of high renewable output. The extent to which these commercial opportunities continue to exist, however, is left to be seen; the price bands at which they commit large volumes today in arbitrage fall within the merit-order of other technologies such as fast-start/recip gas, demand response, and new storage systems especially in a 5-minute settlement world. Perhaps with a faster-than-expected exit of coal and uptake of renewables, there is an enduring seat at the table for these agile systems.