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Things are not what they seem: capturing intraday price volatility

The Australian Energy Market Operator’s (AEMO’s) recently released Quarterly Energy Dynamics (QED) report for Q1 2020 stated that average spot electricity prices in the National Electricity Market (NEM) fell to their lowest levels in 4 years ($66/MWh) last quarter. Victoria, in particular, witnessed a significant drop – 48% – from Q1 2019 average price despite the market’s concern around summer reserve levels and reliability of coal-fired power stations in the state. Is this a new normal, and what does this mean for investment opportunities going forward?

In this Chart of the Week, we present insights into how the ongoing transition is impacting price trends, as well as the dependence of future commercial opportunities on an understanding of the drivers behind these trends.

Whilst Victoria had its lowest average Q1 price in 4 years last quarter, the quarter nonetheless showed strong signs of intraday volatility – a consequential by-product of the energy transition. The energy revenue for storage projects typically require strong intraday arbitrage opportunities to cycle daily; acting as load during low-priced periods and generating during higher-priced periods. Put simply, a ‘decent’ level of price volatility is essential for storage investments. In figure 1, we show the actual Q1 time-of-day averages for the last 4 years, and how our price forecast models (December update) performed against the actuals for Q1 2020.

To examine how intraday price volatility is evolving, we determine the difference between the max/ min (range) time-of-day average values for Q1 2017 to Q1 2020. On this metric, Q1 2020 was the second most volatile quarter (behind Q1 2019) in 4 years with an average time-of-day price range of $293/MWh. Last quarter also had the second highest peak average price ($325/MWh) since 2017. These trends suggest that whilst average quarterly prices are great to appreciate the general commercial health of the market, a more granular look is required to capture the evolving value pockets in the NEM as the energy transition gathers pace. With financial models and future projects not valued on historical prices, the importance of modelling granularity in forecasts cannot be overstated for the emerging NEM.

In the chart above, we plot the time-of-day average for our in-house Benchmark Power Curve (BPC) price forecast employed in a storage feasibility study last December. As shown in the chart, the BPC (dotted line) correctly captured intraday volatility trends for Q1 2020 with an average time-of-day range of $298/MWh against an actual range of $293/MWh stated earlier. Interestingly, the BPC also captured the peak time/price with a $329/MWh average peak price against an actual average of $325/MWh. The ability to capture these evolving price movements will become more important as more renewable projects connect and coal-fired stations retire through this decade; underlining the importance of dispatch frameworks in modelling environments.

Going forward, irrespective of where quarterly average prices fall, intraday pricing will drive value shifts differently in different regions making certain technologies commercially more attractive in some regions than others. We would be providing regular updates on these trends and what they mean for project due diligence across the NEM regions in our Australian Energy Market Investment Forum for banks and financiers. To find out more about the Benchmark Power Curve, the 30-min forecast price data/ how you can subscribe, please contact enquiries@cornwall-insight.com.au