Supply creates its own demand: negative pricing in the NEM

In the National Electricity Market (NEM), generators offer the prices at which they are willing to supply electricity to the system operator – the Australian Energy Market Operator (AEMO) – who in turn matches these offers with demand on a least-cost merit order basis. The offer price of the last MW of supply that matches demand then sets the market price.

However, at certain periods through the day, the market is over-supplied relative to demand and generators compete for dispatch by submitting negative-priced offers which is increasingly setting the market price during these periods. In this Chart of the Week, we investigate how negative prices have been trending through the years and provide commentary on what these trends mean for the NEM and its respective regions.

As seen in Fig. 1, unsurprisingly, an overwhelming majority of negative pricing (30-min) happens during the day – especially in the early- to mid-afternoon. Over the years, the rise of these negative price events in the afternoon has been staggering with CY20 seeing a doubling of instances from CY19. In fact, with just over 3 months into CY21, there has already been more instances of negative pricing in the afternoon (12PM-4PM) than the whole of CY19 during the same period. This trend correlates entirely with the rise of rooftop and grid solar across the NEM; with impacts on both demand and supply.

Whilst QLD contributed an average of 19% to this total afternoon (12-4PM) count of negative pricing in CY20 (SA, VIC and TAS respectively contributed 52%, 21% and 8%), the entire count for CY21 so far has come from southern states alone (see Table 1). A driver for this outcome in QLD has been a change in afternoon bidding patterns for coal units with an average of 500MW less coal volumes now offered in the negative price band than CY20 (Q1). Solar growth is however not entirely responsible for the instances in negative prices with overnight periods particularly in VIC and SA creating opportunities for two arbitrage cycles (daily) in these states. As wind capacity grew in SA and VIC, these regions have accounted for a majority of overnight negative price events in the NEM. In CY20, SA accounted for 43% of the total overnight count with VIC accounting for 25%. So far this year, these overnight negative pricing events have been split almost entirely between SA (52%) and VIC (46%).

Going forward, these trends are likely to create more opportunities for overnight charging of storage assets in these states with morning peaks expected to provide good value for discharging these volumes especially as coal generators increasingly exit the market. This is in addition to the already established NEM-wide mid-day solar-driven price trough vs evening peak arbitrage opportunities. In the medium to long term, these are also good signals for flexible load such as Electric Vehicles (EVs) and hydrogen. To find out more about our views on overnight and mid-day arbitrage opportunities, please contact