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Gas generators getting 20% higher price than wind farms in South Australia

November 25, 2018

Gas generators are getting 20% higher price than wind farms in South Australia

Wind farms in South Australia contributed 42% to electricity generation within the state in the first 22 days of November. Gas generation also contributed 42% as seen in Figure 1. Solar came in third at 16%. The vast majority of this (84%) came from rooftop solar PV. We have compiled this data using NemSight, a software developed by Creative Analytics (part of the Energy One group).

South Australia electricity generation by fuel type

Despite the fact that gas generators and wind farms generated almost identical amounts of electricity, they received very different prices for their power. On aggregate, wind farms received an average price of $87/MWh from the spot market. In contrast, gas generators received a price $18/MWh (20%) higher. Note that we have not adjusted these figures for marginal loss factors (MLFs) in order to isolate the effect of price alone.

Solar and wind farms pushing down wholesale electricity prices

Figure 2 shows the electricity generation from wind farms and solar (both rooftop and large scale). Overlaid on top of this is the 30 minute spot price. We can see that when total generation from variable renewables is low, the price tends to be higher. In contrast, when variable renewables are generating high amounts of power, the price dips.

South Australia variable renewable energy versus spot price

Figure 3 shows this effect more clearly. Here we see the distribution of spot prices in two scenarios: low variable renewable energy (≤ 250 MW) and high variable renewable energy (≥ 1000 MW). We have also shown the average spot price as a red dotted line. Figure 3 shows that wholesale electricity prices are significantly lower when output from variable renewables is high.

South Australia spot electricity prices at low and high levels of variable renewable energy

Price setting in the NEM

In the National Electricity Market (NEM), generators submit bids to AEMO for each five minute dispatch interval. They state how much electricity they are willing to supply and at what price. These bids are then ordered from least to most expensive. The least cost generators (taking into account constraints) are dispatched to serve the demand in the market. The marginal bid (i.e. the last/highest cost generator that is selected) sets the price for everyone in that dispatch interval.

Rooftop solar is already subtracted from demand before we even get to this selection process. Large scale solar and wind farms have a zero marginal cost and hence tend to bid into the market at or below $0/MWh. Therefore, when wind and solar are generating a lot of power, we have high amounts of zero price generation in the market. This means that the market clears at a lower price. In contrast, when there is low generation from wind and solar, the market is more reliant on more expensive generation sources (e.g. gas) and hence clears at a higher price.

Flexibility will become increasingly valuable

Wind and solar have the advantages of being clean, renewable and cheap. However, their major disadvantage is that they are weather dependent and hence difficult to control.

As more and more wind and solar generation enters the market, the wholesale price of electricity will become lower and lower at the times when generation output is high from these assets. In contrast, power sources that are flexible and controllable (e.g. gas, hydro, batteries, demand response etc) and able to ‘fill in the gaps’ in Figure 2, will become increasingly valuable.

Another implication of this is that variable renewables may not be able to provide an effective hedge against prices spikes in the wholesale market. Therefore, any retailers or large energy users who are considering adding high levels of renewables to their portfolios, will also need to think about how to complement this with dispatchable power sources.

 

Want to know more about how solar and wind farms are performing in the NEM and what revenues they are receiving? Get a copy of our detailed analysis.

 

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
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