Electricity prices are trending downward, and lock-downs due to Covid-19 aren’t the only reason.
In the second quarter of 2020, the average spot wholesale prices in the National Electricity Market (NEM) were down by 48% to 68% compared with the same period in 2019.
In 2021-2022, prices are expected to fall even further for residential consumers, by 4.6% to 7.9% depending on location, says the Australian Energy Regulator (AER) in its draft Default Market Offer.
Among the key drivers of this development is the influx of renewable energies, according to the Australian Energy Market Organisation (AEMO).
At 70%, coal still generates the majority of electricity used in Australia, but renewables, including hydro, are on the rise, with a contribution of close to a quarter of total power generation in 2019-2020. And that is helping to push down prices.
“The largest price reductions occurred in Victoria, falling from $79 per megawatt hour (MWh) in Q1 2020 to AUD25/MWh, and in New South Wales, falling from AUD86/MWh to $38/MWh,” states AEMO’s Quarterly Energy Dynamics 2021 report.
National Electricity Market Price Volatility and Wholesale Price Limits
Lowering power prices and the country’s carbon footprint is a desirable outcome. For the electricity market and investors, however, the rise in renewables also poses challenges, particularly regarding price volatility. And in Australia, volatility can hit extremes.
The Australian National Electricity Market (NEM) sets limits but leaves plenty of room to move. The market floor price is -$1,000 per megawatt-hour (MWh), and the maximum spot price is $15,000 per MWh, a whopping $16,000 difference.
“The extraordinary thing is that the NEM achieves those boundary conditions on a regular basis,” says Ashleigh Antflick, finance and risk director at Australian renewable energy company Maoneng. Investing in a market like that can get a bit nerve-wracking.
Essentially, volatility comes down to supply and demand, explains Mr. Antflick. When everyone needs electricity on a hot day with air conditioners on, high demand pushes up prices. Meanwhile, during times of low demand but high supply, prices drop.
With fossil fuels, it is easier to cater to these changes in demand. Generators produce more electricity when it is needed, and less when requirements are low.
Renewable Energy Supply Challenges in Australia’s Power Market
The issue with renewable energy sources is this – they are difficult to predict.
“Who knows whether a large cloud will park itself over the ACT and cause the solar farms in the ACT to reduce their output,” Mr. Antflick says.
Therefore, one of the most crucial aspects of reducing volatility as Australia moves toward a renewable energy future is electricity storage.
If a solar farm produces energy at a time of day when none is needed and the NEM has set prices at -$1,000 per MWh, generators must pay the grid to take the electricity.
However, if they can instead store energy when prices are low and sell it when prices are high, they make money – and so does anyone who invests in renewable energy producers.
Battery Energy Storage Systems Key to Stabilising Electricity Prices
And there is still a significant shortage of storage, with battery energy storage systems contributing only 0.06% to generation last year.
More is urgently needed. As Australia turns toward renewables, the unpredictable nature of wind and solar will otherwise increase volatility and put pressure on the grid.
“Batteries can mitigate grid congestion and defer the need for new power lines,” according to strategic research provider BloombergNEF. And with costs for battery systems plummeting, they are becoming an increasingly viable option.
“While grid costs are rising or remain flat, the cost of a four-hour duration lithium-ion battery system is expected to drop by 68% to $104 per kilowatt-hour by 2050, from $320 per kWh in 2020,” reports BloombergNEF.
The solution to keeping volatility at bay and power prices low is clear. The question is whether investment in storage systems will keep up with the accelerated growth in the renewable energy sector.
Created for the Australian Maoneng Group’s Transcendence Network for publication in June 2021.