Is increased volatility the new norm?

This year has showcased an increased level of volatility in the National Electricity Market (NEM). To date we have seen significant fluctuations in spot prices with prices hitting both maximum price caps on several occasions and ongoing growth in periods of negative prices with generation being curtailed at times.

Some of the price fluctuations we’ve seen recently stem from weather-related issues, such as the extreme event in Victoria on 13 February that saw transmission lines brought down and plants tripping.

Overall, however, the increase in extreme price periods (either high or low) suggests the supply-demand balance is becoming tighter than it was historically, and harder to accurately predict. As highlighted by the Australian Energy Market Operator’s (AEMC) Electricity Statement of Opportunities (ESOO), if the expected investments in new generation, storage and transmission are not delivered on time we can expect not just future reliability risks but elevated price volatility. Below we take a look at some recent examples of extreme price periods.

The NEM operates across Queensland, New South Wales, Victoria, South Australia, and Tasmania. It functions as a competitive energy-only market with electricity spot prices determined in real time through an auction system and settled on a five-minute basis.[i]  Spot prices in the NEM can be highly variable, ranging from -$1,000/MWh to the maximum price cap of $17,500/MWh, depending on the supply-demand dynamics.

The market has a mix of energy sources, including coal, gas, variable renewables (wind and solar), battery and pumped hydro storage and run of river hydro. Despite good progress in bringing in renewables into the grid, it remains highly dependent at times on the availability of baseload coal or other dispatchable plant. Limited availability of dispatchable plant can lead to high price events.  

The average price last financial year ranged from $63 to $102/MWh in all regions and in the second quarter this year wholesale spot prices averaged $133/MWh across all NEM regions. But a look at high price events since October 2021 shows that this year there have been a significant number of events where the price was about $15,500/MWh (see Figure 1). The Australian Energy Market Operator’s most recent energy quarterly report (second quarter 2024) also made note of extreme price volatility in May this year that led to a period of administered pricing, with spot prices capped in New South Wales at $600/MWh.

Figure 1: Events (number of 5-min intervals) with a price higher than $15,500/MWh in NEM

Source: AEC analysis of NEOExpress data

At the other extreme we are also seeing periods of negative prices.  At one point on Sunday 15 September around 99.7 per cent of generation from utility-scale solar farms was curtailed[ii] in South Australia, according to University of New South Wales data. It was brought about by the combination of subdued demand for electricity in the milder spring weather and the availability of significant amounts of generation from a continually growing number of rooftop PV installations.

That combination of conditions led to a significant number of negative price events across September and on occasions led to large solar and wind farms powering down. Much of this curtailment is likely driven by economic factors[iii]. In a 2021 report, ARENA estimated 58 per cent of curtailments were economic.

Curtailment can either be forced for technical reasons, essentially when the network is constrained for the amount of renewable energy that is available and trying to feed into the grid, so the output is limited. Then there is self-curtailment (also called economic curtailment) which occurs when there is so much renewable energy available that prices go negative which will require generators to pay for a user to take the electricity.

Renewable generators may offer electricity even at negative prices, for example, if they can earn revenue from renewable energy certificates (RECs) equivalent or close to the negative price. Some output may also be contracted at a fixed price independent of the spot price.

In South Australia, between December 2020 and February 2021, based on Australian Energy Council analysis of September data (1-23 September) there has been dramatic growth in the number of negative price events (5-minute intervals) over the past two years. ARENA estimated that in SA between December 2020 and February 2021, negative pricing occurred in 20 per cent of trading intervals.  In September 2022, negative priced events occurred 23 per cent of the time, while this year (month to date, 1-23 September) there were 2,897 negative priced events representing 44 per cent of all events across those dates.

On 1 September 2024 prices were negative in 40 per cent of the day’s intervals, which led to 28 per cent of renewable generation being curtailed.  Two weeks later, on 15 September, negative prices were also pronounced with 26 per cent of renewable generation curtailed (see figures 2 and 3).

Figure 2: South Australia – Negative Prices and Curtailment, 1 September 2024

Source: AEC analysis of NEOExpress data

Figure 3: South Australia – Negative Prices and Curtailment, 15 September 2024

Source: AEC analysis of NEOExpress data

Primarily negative prices have been driven by the uptake of rooftop PV capacity which has grown from one GW in 2011 to over 20 GW in 2024.  In delivering negative prices, the energy-only market is signalling excess supply during those periods and we are likely to see energy businesses look at new business models, such as batteries to soak up excess generation, while large users are likely to respond and change their consumption patterns where possible to take full advantage of the surplus electricity.

Baseload power and its importance

In Australia, coal-fired power plants have traditionally been the primary source of baseload generation able to provide a steady, reliable supply of electricity and operate around the clock.

While historically coal has been the cheapest form of electricity, new build in the NEM has been dominated by wind and solar variable renewable energy (VRE). While in levelised cost terms VRE is competitive with other technologies, it has one critical flaw, it depends on the weather to determine its output. Hence, it is unable to replicate the high baseload capacity factors that coal can. Capacity factor is a measure of the utilisation of a generator’s capacity in MWhs generated over the course of a year. For example, if a 400 MW plant generates at a capacity factor of 80 per cent, it has generated 2,803,200 MWh over the course of the year.[iv]

Price dynamics between baseload and peak

If limited renewable generation is available and there is a relatively small gap between baseload generation and operational demand (demand for electricity from the grid), other dispatchable power, like hydro, gas and batteries, can meet the remaining demand.  

When there is a large gap between demand and baseload, the system operator will require all (or almost all) of the other market participants to supply electricity to meet demand needs. On these occasions, the demand can be very close to the available capacity in a region, leading to higher prices as the highest priced generation is called on to meet demand.

For example, on 21 January this year when demand in Queensland was near an all-time high, while 95 per cent of capacity was offered below $5000/MWh in two 30-minute intervals, some high-priced capacity needed to be called on (up to 159 MW was required according to the Australian Energy Regulator).[v]  As a result, the 30-minute price at 6:30pm hit $12,973 while the spot price reached almost $16,600/MWh in all but one of the six five-minute intervals between 6:15pmand 6:40pm (see table).

5-Minute Interval Prices Qld (17:55-18:50), 21 January 2024

At the time actual demand was much higher than forecast by up to 374 MW, while actual plant availability was lower than expected for the 6:30pm high price in Queensland.

On the day high temperatures had driven the demand levels, while other factors at play were network congestion in northern NSW limiting flows into Queensland from NSW and some rebidding occurred for technical reasons, which included cooling water system issues.

At the 6:30pm high price period the QNI interconnector was actually sending power to NSW because flows were needed to manage a system normal constraint in NSW on the Bayswater to Liddell lines and avoid a possible overload.

The other smaller interconnector, Terranora, was only sending 4 MW to Queensland and was limited to manage the possible overload of the Lismore to Dunoon power lines in NSW, according to the AER’s event report.

On 29 February this year in New South Wales, prices spiked with the spot prices reaching $13,326/MWh for the 5pm 30-minute period. While an average of 90 per cent of capacity was offered below $5000/MWh, a small amount of high-priced capacity was required to meet the demand.

Again, high temperatures and humidity led to higher demand than forecast in New South Wales, while network congestion limited flows through southern parts of the state, while there was rebidding mainly for technical reasons.

[i] https://www.aemc.gov.au/sites/default/files/content//Five-Minute-Settlement-directions-paper-fact-sheet-FINAL.PDF

[ii] According to data from UNSW.

[iii] Solar farm output wastage tops 99pc in South Australia, Australian Financial Review, 18 September 2024.

[iv] 400 MW multiplied by 80% = 320. Then 320 multiplied by 8,760 (hours in non-leap year) = 2,803,200.

[v] Electricity 30-minute prices above $5000 per MWh – January to March 2024.