Financial year ending June 2019 saw wholesale electricity prices rise in every state in the National Electricity Market (NEM). Victoria had the highest increase on the previous financial year at 19%, followed by South Australia (12%), Queensland (10%), New South Wales (8%), and Tasmania (3%) (see Figure 1). This data has been compiled using NemSight, a software developed by Creative Analytics (part of the Energy One group).
Wholesale electricity prices have tripled over the past decade in Victoria and Tasmania and have doubled in Queensland, NSW, and South Australia. This energy crisis has been brought about by a combination of factors coming together. These include high gas prices, a decade of policy uncertainty, exit of ageing generation, lack of competition, outdated market rules, and more. And it is still very much on-going. Prices in South Australia, Victoria, and NSW all reached record highs in the 2019 financial year.
Pricing in Tasmania peaked earlier in FY 2016, due to a prolonged outage of the Basslink interconnector, which links to the mainland grid.
Queensland peaked in FY 2017. In mid 2017, the Queensland Government directed state owned generators to alter their bidding practices and put downward pressure on wholesale electricity prices. This direction has been one of the main reasons why Queensland has had the lowest wholesale electricity prices in the NEM for the last two years, despite growing max demand. However, this bidding direction ended on 30 June 2019. It will be interesting to see whether the bidding behaviour from state owned generators reverts back to old patterns over the coming summer.
Victoria and South Australia battled record heat and coal failures
High summer prices drove the annual price increase in Victoria and South Australia as seen in Figure 2. This was largely weather related as Australia sweltered through the hottest summer on record.
However, it was also due to multiple failures at Victorian coal-fired power stations, particularly on the 24th and 25th of January. An extreme heatwave gripped South Australia and Victoria, with some regions experiencing record high temperatures. Multiple brown coal outages led to 1.1 GW of thermal generation being unavailable on 24 January and 1.6 GW being unavailable on 25 January (see report by AEMO). This created a shortage of supply, with the unfortunate result of load shedding in Victoria and record high electricity prices.
NSW coal and hydro generators raised bids
In contrast to Victoria and South Australia, pricing in NSW was not particularly volatile. The main contributing factor to higher prices was a change in bidding behaviour from coal and hydro generators during the first quarter (Jan to Mar) of 2019.
Figure 3 shows that black coal generators reduced the amount of electricity they offered in price bands ≤$100/MWh and instead bid this energy into higher price bands between $100/MWh and $300/MWh.
The change in bidding behaviour was even more drastic for hydro generators, who significantly cut bids in the ≤$100/MWh and $300-13,000/MWh price bands and instead bid this energy at prices greater than $13,000/MWh. Dry conditions and low storage levels were contributing factors.
Spreads in wholesale electricity prices on the rise
Another interesting trend over the past decade has been the growing spread (or difference) between the 10th and 90th percentile of pricing. This has interesting implications for energy storage, which is most economic when spreads are high.
Figure 4 shows the spread for each region in the NEM in the last financial year versus 10 years prior. Ten years ago, spreads very were small, varying between $17-24/MWh across states. This offered limited arbitrage opportunities in the spot market. In contrast, in the last financial year, spreads ranged from $60/MWh to $125/MWh. As an example, the Tesla big battery in South Australia achieved an average price differential of $76/MWh (inclusive of round trip efficiency losses).
As more zero marginal cost renewable energy enters the market, we can expect wholesale prices to keep decreasing at the times when renewables are generating power.
Queensland gave the perfect example earlier this week when daytime prices hit zero/negative for a record nine consecutive days. This was predominantly due to high solar uptake, low electricity demand, and inflexible coal. RenewEconomy covered some of our commentary here and here.
In contrast, when renewable energy is less available, prices tend to go up. The opening up of spreads is a predictable outcome of the transition to renewable energy. It will be largely up to energy storage, as well as demand response, to regulate spreads going forward.
Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
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National Electricity Market year in review part 1/2: Wholesale electricity prices
January 8, 2019
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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
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