Crunch time for energy amid winter market turmoil
Game of electricity prices lives on for the east coast
As we bid farewell to winter 2022, Caldera House looks back on the turbulent east coast electricity market. What happened? Why? Where to from here?
What is the east coast electricity market?
Installed in 1989, the electricity market is a single system that runs from North Queensland to New South Wales, South Australia and Tasmania, interconnected by transmission lines and run as a spot market by the Australian Energy Market Operator (AEMO).
Generators on the network bid into the spot market and the market operator will dispatch, or bring on the generation from the generators until they’ve met the demand that is required.
Why was the national power market suspended?
In June, Australia’s east coast electricity prices were pushed to their highest levels on record, which led to the suspension of the national power market for the first time ever. This was driven by soaring fossil fuel costs, a spate of coal-fired power station failures, unscheduled maintenance and shutdowns. Unless you were sitting in a sauna the whole time on the east coast, the cold weather snaps were driving more and more demand for electricity.
Here is how it happened.
Australia has two wholesale electricity markets: that's where the power supplier buys energy from those who make it. All states and territories (except Western Australia and Northern Territory) are part of the National Electricity Market (NEM). As noted, generators "bid in" their offers, telling the market how much they're willing to produce.
The AEMO is in charge of these markets, and in June it kicked in a price cap. That limited the price that power generators would be paid to $300 per megawatt hour (MWh) megawatt hour. However, generators were withdrawing their bids to supply energy due to the fact that their costs were far higher than the cap. And then…
…that's when the national power market was suspended for the first time. Ever.
What are some market stressors, and what’s happening with pricing?
The average electricity price tripled to an all-time high last quarter.
Wholesale spot prices in the NEM rose to unprecedented average levels in Q2 2022. The quarterly average NEM spot price of $264/MWh was more than double the previous high of $130/MWh recorded in Q1 2019, and more than triple Q2 2021’s average of $85/MWh.
Quarterly volume weighted average spot prices – regions
Some market stressors underlying the extraordinary rise in wholesale prices in Q2 include:
International gas and coal market: the impacts in local fuel markets of extremely high international prices for traded gas and thermal coal.
Reduced availability of coal-fired generation: maintenance as well as long and short duration forced outages.
Constraints: physical fuel supply and hydrological constraints at a number of thermal and hydro generators further limited their operational flexibility.
Early arrival of very cold weather: no explanation needed.
What’s the solution?
If you speak to Mike Cannon-Brookes, this energy crisis has been caused by insufficient investment in renewable energy. Opinions vary but diversification of energy sources does seem like a viable option with an aging fleet of coal plants and a changing climate.
Wind and solar is around $40 to $60/MWh to generate, far below the $300 cap. So could greater wind and solar protect the east coast against volatile electricity prices in periods of high demand?
Building solar and wind power energy systems is cheaper than any other option right now, and they are predicted to ultimately produce far more electricity than is currently demanded. Any extra energy generated could be stored (via projects like Genex Power’s (ASX:GNX) Bauldercombe Battery), exported or used to produce green hydrogen – something else which is also expected to play a role in the overall energy market of the future.
Of course, it’s not that simple: wind and solar are impacted by fluctuations in weather. However, economics will be the tipping point in the switch to renewables. Either way, significant thought and investment is required to fix the east coast energy conundrum and if this recent crisis drives the clean energy revolution, we’re here for it.
Watch this space.
Sources:
Australian Energy Market Operator – “Quarterly Energy Dynamics – Q2 2022” Report
ABC News – “Electricity Market Suspended amid Record Power Prices.”
UNSW – “Are Solar and Wind Cheapest Forms of Energy?”
DISCLAIMER: Caldera House Pty Ltd holds an equity position in Genex Power Limited