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Tis’ all about the Benjamins: foregone value of solar constraints

Summer is now well and truly behind us however grid stability remains a concern with no relief in sight for the five (5) solar farms across Victoria and NSW currently constrained to ~50% of their output. The constraint has been in place since mid-September last year and is expected to last until at least mid-2020 (when AEMO’s solution for rectifying fault current issues in the Red Cliffs area is implemented). This Chart of the Week investigates opportunity cost estimates (foregone revenues) for the constrained projects.

Through a time-of-day analysis of generation from the solar projects, we investigate lost revenues for the 5 solar farms if they had been dispatching their full output when constrained.

As shown in Figure 1, between the 13th of September last year and 29th of February 2020, up to $15 million in merchant value has been lost across all 5 projects. This figure should be viewed as an upper bound on opportunity lost due to:

  • the assumption that these projects would have been able to generate up to their full output when they hit the constraint
  • the fact that if they had been unconstrained, they are likely to have had a suppressive influence on price outcomes

Interestingly, October had the most value of all the months examined in this analysis with ~$4 million in opportunity costs; a surprising outcome given Q1 months are usually quite bullish in prices. The main driver for this is the significant difference in middle-of-day price outcomes between October and January. Despite Victorian prices in January averaging $143/MWh compared to $101/MWh in October, captured prices for the solar farms in Victoria (during constrained periods) averaged ~$89/MWh and $47/MWh for October and January respectively (~$42/MWh difference). Whilst this is partly driven by planned coal outages in the shoulder months, it also fundamentally reflects growing volatility within the day especially during summer with evening periods becoming increasingly more valuable. This volatility seen in Victoria is less visible in NSW with the difference between October and January middle-of-day captured prices during constrained periods averaging ~$10/MWh.

With other value streams outside merchant revenues such as large-scale generation certificates (LGCs), the opportunity cost reported in this analysis does not reflect the full picture of the revenue impact of this constraint. If this constraint in continues it is left to be seen how these opportunity costs evolves through time for both the already constrained projects and projects experiencing significant connection delays. Of relevance is the recent announcement from the Victorian government about its willingness to work closely with the Australian Energy Market Operator (AEMO) to alleviate grid constraints in the state and unlock more renewable capacity.

Going forward, whilst market forces and economics will continue to determine the value spread of intraday pricing and volatility, we expect these merchant opportunity costs to plateau under current market conditions. Market players with a flexible portfolio (e.g Gannawarra with co-located storage) will have more room to manage these risks either through energy shifting, or the ancillary services markets. For more on Cornwall Insight Australia’s views on these costs going forward, please contact us at: enquiries@cornwall-insight.com.au.