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Push it to the limit: the evolution of MPC & market tightness

With summer officially starting last Tuesday, the National Electricity Market (NEM) is about to go through the season that typically has the highest demand. Market tightness usually seen during summer sometimes pushes power prices to their maximum level – the Market Price Cap (MPC) – currently set at $15,000/MWh.

In this Chart of the Week, we investigate recent trends in sustained MPC events and provide commentary on drivers behind these trends as well as what to expect going forward.

In Fig. 1, we plot a count of settlement periods (average of 6 5-min dispatch intervals) when prices have reached MPC in each state. To account for when prices hit MPC during an ‘organic’ market tightness and to filter out MPC events caused only by unexpected contingencies, we also plot a count of settlement periods when prices hit MPC during strong demand (demand > 90th percentile for the year) in each mainland state. Perhaps unsurprisingly, as seen in the chart, every instance of settlement price at MPC in all states is (at least) partly driven by extreme demand as opposed to unforeseen contingencies alone.

As shown in the chart, instances of sustained MPC – especially during high demand days – have been on the rise in recent years. In the last 2 years, the total count of periods when the market has settled at MPC is 16 times the count of the previous 3 years (FY16-18). Perhaps more tellingly, prior to FY19, the market had only once – in New South Wales (NSW) – settled at MPC when demand was higher than the 90th percentile demand for the year. Since FY19, this figure has increased to 17 with other states now complicit in this increase. Victoria and South Australia (SA) have especially felt the impact of Hazelwood’s retirement particularly during peak demand periods in summer.

Due to the correlation in weather patterns between both states, high demand periods are increasingly happening on the same days. On the supply side, wind output can also be similar in both states during these summer super peaks. In FY19, prices settled at MPC only in SA and Victoria with the entire count (10) happening within the same 24 hours in both states. On January 24, 2019, the settlement price hit MPC in Victoria for 2 consecutive periods (6.30PM – 7PM), and at 11.30AM the following day. In SA, the market settled at MPC for 7 consecutive periods (5.30PM to 8.30PM). Whilst demand was very strong in both states (highest 30-min demand was recorded in SA on this day), other factors also played key roles in this outcome.

During these high price periods, wind output peaked at 205MW in SA and 400MW in Victoria. This compared to wind’s total installed capacity of around 1.5GW in SA and around 1.2GW in Victoria at the time. Forced outages to a few of the aging brown coal fleet (mainly Yallourn and Loy Yang A) in Victoria also removed around 880MW from the market by 2.30PM in the afternoon of January 24. Temperature issues similarly forced other brown coal units to revise-down their bid capacities.

Going forward, with climate experts predicting more extreme temperature events, and aging coal assets retiring (and becoming less reliable), should the NEM expect more summer days like this when the entire system will be put to the test on low wind/strong demand days? More importantly, what impact will incoming batteries have on the chart above in the coming years?