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National Electricity Market year in review part 1/2: Wholesale electricity prices

2018 has been another challenging year for the energy industry. Hopes of a national policy that merges energy and emissions were dashed with the collapse of Malcolm Turnbull’s leadership in August. Nonetheless, consumers, businesses and state governments are forging ahead with the energy transition. In this special two part blog series, we will be looking back at what all of this has meant for the National Electricity Market (NEM) over the past year. This is Part 1/2 where we will be focusing on wholesale electricity prices.

The National Electricity Market has been in the throes of an “energy crisis” for the last three years. The energy crisis has been brought about by a combination of factors coming together such as high gas prices, a decade of policy uncertainty, exit of ageing generation, a lack of competition, outdated market rules, and more. This has resulted in record high wholesale electricity prices.

Figure 1 shows the average annual wholesale electricity price for each state from 2010 to 2018. We have compiled this data using NemSight, a software developed by Creative Analytics (part of the Energy One group). As can be seen from Figure 1, wholesale electricity prices eased in 2018 in all states, which is welcome news for consumers. However, prices still remain at very high levels relative to historical values.

State Government action led to very sharp falls in Queensland wholesale electricity prices

Wholesale electricity prices in Queensland fell by 27% in 2018. This is the highest price reduction out of any state. Figure 2 shows that this can be attributed to the first quarter of the year (Jan to Mar). In 2018, the average Q1 price in QLD was less than half that in 2017 ($69.99/MWh compared with $173.20/MWh). This is despite the fact that the 2017 record for the highest ever electricity demand in QLD was broken four days in a row in February 2018.

This dramatic price decrease in the face of record high demand was largely due to the Powering Queensland Plan implemented by Queensland State Government.  The QLD Government owns the majority of the generation in the state. As part of the Powering Queensland Plan, Stanwell Corporation’s (state owned entity) Swanbank E  385 MW gas fired power station was returned to service.

The QLD Government also directed Stanwell Corporation to alter their bidding practices to put downward pressure on wholesale electricity prices. Stanwell is the dominant player in the QLD market and has historically used its market power to raise prices and thereby increase profits. Consequently, this direction by the state government has had a significant impact on pricing.

Figure 3 shows how Stanwell’s bidding behaviour has changed in the first quarter of 2018 versus 2017. It shows the average amount of megawatts that Stanwell offered into the market for each 30 minute Trading Interval and the associated price bands. We can see that the total energy offered was higher in 2018, which can be attributed to the return of Swanbank E. But even more significant is the change in pricing. On average, Stanwell offered 655 MW of extra power at prices less than or equal to $300/MWh.

Higher availability of cheap hydro led to price falls in Tasmania

Tasmanian wholesale electricity prices fell by 25% in 2018, the second biggest fall in the NEM. The biggest price reductions occurred in the second and third quarter of 2018 as shown in Figure 4. Electricity demand tends to peak in Tasmania during this time. Figure 4 shows that peak demand was 4% lower in 2018 compared with 2017, which eased pressure on prices. However, the far bigger factor had to do with the bidding behaviour of hydro power.

State owned hydro generation has close to a complete monopoly over the Tasmanian market. Figure 5 shows the drastic change in bidding behaviour from April to September in 2018 versus 2017. In 2018, hydro power stations offered an average of 627 MW of extra power at a price of less than or equal to $100/MWh. This is significant in any market, but especially so in a small market like Tasmania.

Lower demand eased wholesale electricity prices in NSW

Wholesale electricity prices in NSW fell by 14% in 2018. Similarly to Queensland, the biggest price reduction occurred in Q1 (see Figure 6). The key drivers of the Q1 price decrease were:

(a) Lower demand predominately due to less extreme summer heat and to a lesser extent, growth in behind the meter solar PV. Peak demand in Q1 was 1230 MW (9%) lower than in 2017 (see Figure 6); and

(b) There were fewer periods where high temperature days in NSW coincided with severe weather in other regions.

Victoria and South Australia experienced only slight price reductions

Hazelwood, a 1600 MW brown coal fired power station in Victoria, was closed at the end of March 2017 on very short notice. This left many fearing the worst for Victoria and South Australia for the upcoming summer. AEMO acted swiftly to put together a summer readiness plan, which brought close to 2000 MW of additional resources into the NEM. This included procurement of 884 MW of demand response (with support from ARENA) through the Reliability and Emergency Reserve Trader (RERT), as well as making available previously mothballed gas generation such as Pelican Point in South Australia.

The result was that wholesale electricity prices actually dipped slightly over 2018. 5% in South Australia and 2% in Victoria. However, it should be noted that Victoria was the only state in the NEM to experience higher Q1 prices in 2018 (see Figure 7). As we previously reported, Victoria set a new record for the highest ever wholesale electricity prices during January. There was unusually hot weather and coal fired generation tripped. Unfortunately, all of this also coincided with low wind output. Similar weather conditions prevailed in South Australia, and with Victoria being South Australia’s only point of interconnection, both states experienced volatile pricing.

Nonetheless, without proactive action from AEMO, the situation could have been much worse. Maintaining system security and achieving an overall price reduction in both Victoria and South Australia, however slight, is the best result anyone could have hoped for.

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
Follow Marija on LinkedIn | Twitter

Victoria sets new record for electricity prices

Victoria has traditionally been considered the “boring state” when it comes to volatility in wholesale electricity prices. But that all changed last month when the average spot price for Victoria hit $133.48/MWh, setting a new record for January prices for the state. January 2018 narrowly missed out being the highest flat average for any month, only being surpassed by June 2007 ($143.28/MWh).

This increase in volatility comes on the back of 2017, which saw several factors come together to create an unprecedented energy crisis in the National Electricity Market (NEM). Some of these key factors include a decade of policy uncertainty, exit of ageing generation, high gas prices, outdated market rules, and a lack of competition. The energy crisis during 2017 produced the highest annual average spot price for Victoria ($66.58/MWh) since the commencement of the NEM in the late 90s. Despite energy becoming one of the hottest issues in government and the media over the last 18 months, high pricing has continued into 2018 as seen in Figure 1.

January 2018 has been unusually hot for Victoria. According to long term climatic data from the Bureau of Meteorology, Melbourne has an average of 0.7 days with temperatures ≥ 40°C during January. January 2018 had three days that exceeded 40°C. In contrast, January 2017 had none, and January 2016, only one. Furthermore, this is the first summer without Hazelwood, a 1600 MW brown coal fired power station that closed at the end of March 2017.

Victoria had four days in January where spot prices exceeded $2,000/MWh, compared with zero in the whole of 2017, and only two during 2016. The highest pricing came on Thursday the 18^th of January 2018. The spot price peaked at $12,931.04/MWh during the 5pm trading interval, setting a new record for the highest ever 30 minute spot price in Victoria. A scorching heatwave drove electricity demand up to relatively high levels. However, the 18^th was only the third highest demand day in the month. We were able to take a deeper dive into how the day unfolded by using NemSight, a software created by Creative Analytics (part of the Energy One Group).

Coal and wind generation were both less available

As can be seen in Figure 2, Loy Yang B, Victoria’s newest and most efficient brown coal-fired power station, tripped in the afternoon resulting in a sudden loss of 525 MW. Furthermore, wind power availability was about 700 MW lower than earlier in the day. Although this loss of generation was much more gradual. Nonetheless, reduced availability of coal and wind were both significant. This is because both are very cheap sources of power.

The generator bidding data in NemSight shows that all Victorian wind farms were bidding 100% of their output at prices ≤$0/MWh. Similarly, Loy Yang B was bidding all of its output at prices ≤$25/MWh. The reduced availability of this cheap electricity made Victoria more dependent on the highest priced gas and hydro generators, who were bidding in excess of $10,000/MWh, and thereby driving up prices. Figure 3 shows a summary of the bidding behaviour during the peak price period from 3 to 6pm.

Smart energy to pave the way forward

The events of the 18^th of January highlight another point. When it comes to the reliability and affordability of electricity, it is not a battle between renewable energy and fossil fuels.  Thermal generators are susceptible to failure at high temperatures. While intermittent renewables, such as wind, are dependent on prevailing weather conditions and hence are largely out of our control. Neither characteristic is effective for meeting peak demand reliably. Rather than waging a war between renewable energy and fossil fuels, we should be thinking about how we can make our energy systems more intelligent and resilient with enabling technologies such as energy storage, demand response, and predictive analytics. Smart energy is the key to a cleaner, cheaper, and more reliable electricity grid.

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
Follow Marija on LinkedIn | Twitter