Do negative spot electricity prices spell end of renewable transition?
Based on recent headlines, you could be forgiven for thinking that we are on the brink of a wholesale electricity price disaster.
Australia is transitioning from an energy system centred around coal generation, to a structure comprising less coal supplemented with more flexible renewable energy generation.
In a transition that has seen some major changes in the wholesale energy market, two major events recently made news.
First, the spot price of electricity fell to zero in every eastern State for five minutes during a sunny and windy lunchtime in July – ideal conditions for renewable energy generation.
Then, in early September, a transmission outage dropped Queensland’s spot price to the regulated floor of minus $1,000 a megawatt-hour.
Some spectators blamed the supply “flooding of the market” on new solar generation and asked if this spelled the end of the renewable energy “boom”?
Watching the wholesale electricity market is like watching the stock market on steroids.
The spot pricing is set every five minutes across more than 100,000 intervals each year.
Price volatility has long been a feature of the spot market and this is only expected to increase over time, due to climate changes and other factors.
However, electricity prices at any point in time are a function of fluctuating demand, and the supply side behaviours of participating generators in the National Electricity Market.
The occasional midday and afternoon gyrations in the spot price has less to do with extra capacity from renewable generators and more to do with an inability or unwillingness of coal generators to cycle down to meet demand.
Many coal generators are insulated against negative prices, since most electricity is not traded not on the spot market but rather under confidential bilateral contracts with fixed pricing.
These contracts usually also set fixed volumes. This means that contracted – that is hedged – generators are not incentivised by spot pricing, as the price difference is borne by their counterparties. And, where they have over-contracted volume, they are incentivised to generate even during times of negative pricing.
As Queensland spot-prices descended into negative territory, local coal generators were pumping out roughly 65 per cent of the total power supply.
Renewable energy is resilient to negative pricing in a different way. Generators of renewables are far better positioned to take swift action: they just switch-off.
For unhedged coal generators, there’s another consideration.
Renewable energy has zero fuel costs but coal has significant (and increasing) fuel and operational costs in the range of $40-$65 per megawatt-hour.
When spot prices go to zero or negative, these unhedged coal generators feel the pain twice –negative pricing and paying for fuel. This prompted the accelerated exit of Northern and Playford coal generators in South Australia after a period of negative pricing events.
Unfortunately for coal, this is a case of base-load being the opposite of flexible. And we are moving into a future where flexibility has increasing value.
As Australia moves to replace ageing coal generators over the coming decades, there is an opportunity to embrace lower cost and more flexible options that will provide Australians with lower energy prices. Renewable energy remains future-focused and investments in the sector will play a key role in our energy future.