As power prices crash below zero, don't expect it to show up on your power bill
Daytime wholesale electricity prices are dipping below $0, but our power bills keep on going up. Why this is happening is a complicated story, find out why you shouldn't expect any price relief anytime soon. Solar is the only way to lower your power bills!
Electricity prices turning negative on the spot market are:
A) A huge benefit to consumers struggling to pay their power bills
B) A precursor to the collapse of the National Electricity Market
C) Evidence that renewables are killing coal-fired generation
D) Evidence coal-fired generation is killing off renewable investment
E) None of the above
Nothing is ever that simple in the bewildering and opaque NEM, but (E) is probably the closest thing to a correct answer.
The idea generators are bidding to pay the market operator, AEMO, up to $1,000 per MWh (Megawatt hour) to offload their unwanted generation seems nuts in a time when household power bills are so high.
For conspiracy theorists, there are a few different threads to peddle.
From the coal supporters, there's the idea too much solar and wind generation has been allowed to be built and that has undermined the entire industry and made the network less reliable.
From the other side of the fence, the suspicion is 'big coal' is flexing its muscles to force down prices in the middle of the day and squeeze the life out of future renewable investment.
Neither theory really stacks up.
Why won't my power bill go down with negative prices?
Household bills are fixed to regulated contract prices, which are set every year. Fluctuations in spot prices paid to generators — either the current spate of negative prices or the exorbitant spikes of seen in the height of summer — do not show up on your bill.
Down the track is another matter.
"A week of negative prices isn't going to change your electricity bill, unfortunately," independent energy markets consultant, Allan O'Neil says.
"If you saw weeks and weeks of negative prices it would tend to flow into forward contracts to retailers next year and indirectly impact your bill, but it's a lengthy process."
David Leitch, principal at the energy consultancy ITK, agrees.
"Historically, pool prices are a leading indicator of domestic prices," Mr Leitch says.
"The drought's impact on hydro and the breakdown of some big coal generators, has masked the fact that supply is growing faster than demand."
With pool prices likely to fall as the supply/ demand dynamic plays out, domestic prices should fall too, eventually.
"Of course, all this could be sped up with a greater focus on efficiency, and investment in better transmission within the NEM," Mr Leitch observes.
Why are generators paying big money to offload their power?
The simplest answer is there are generators, with sufficient capacity to power Queensland's needs, saying to AEMO, "I'm willing to pay you $1,000 per MWh to take my power".
Beyond that it gets complicated, but negative bids are not that uncommon and there are a variety of reasons generators would be prepared to pay to offload their power.
It is cheaper for most big coal generators to pay to keep their turbines turning than shut them down and restart themMany renewable generators have fixed-price contracts and don't worry about the spot priceLarge-scale generation certificates: if the value of a renewable generators' LGCs (say $40/MWh) outweighs the spot price (say -$20/MWh), profits are still made by selling at negative pricesUsing the markets' hedging (or derivative) contracts, in some circumstances, a generator can make serious money if "short" in power when the price is negative; the counterparty, of course, pays a motza
While domestic customers may not have seen the negative prices passed on, and some generators are bleeding, there are still winners around.
Big battery owners and operators are effectively being paid to recharge their units, a bit like a supermarket being paid by suppliers to restock their shelves.
Industrial users, with direct contracts with generators, are also enjoying their moment in the sun, so to speak.
However, it's swings and roundabouts. Those same industrial users, unless they hedge their consumption, get hammered in the height of summer when spot prices soar towards the $14,700/MWh ceiling.
Is it unusual?
While it is predominantly a Queensland phenomenon at the moment, historically it is more common in South Australia with its large fleet of wind generators, while Tasmanian spot prices occasionally go negative as well.
Mr Leitch says once the big and broken Victorian coal generators come back on line, negative spot prices will become even more common.
"It shows the effects of a surplus or deficit in one state. It's a foretaste of what we will see in the future … as more solar on roofs is added," he said.
"When it's sunny and windy, the conditions are right to force prices down to negative and zero areas right across the NEM."
The recent spate of negative prices started in late July, hit their straps in August and already there have been several times this month when prices have hit their regulated floor.
This time of the year Queensland is pretty sunny and the east coast is pretty windy. Mild temperatures mean neither air conditioners, nor heaters are demanding much power.
In other words, cheap supply is high, particularly during daylight hours, while demand is low.
Throw in the breakdown in power transmission between Queensland and New South Wales earlier this month and you have the perfect conditions for -$1,000/MWh prices.
Prices were noticeably higher, and positive, in other states at the same time.
Volatility on the rise
Putting the current climate in Queensland to one side, volatility in wholesale prices is increasingly common across the NEM.
"There has been an increase in volume offered at $0/MWh and below — not just from wind farms and solar farms — and an increase in volume offered above $300/MWh," the authoritative and independent report on power generation from WattClarity found earlier this year.
Co-author of "Generator Report Card 2018" Paul McArdle says negative prices are a natural part of a functioning "energy only" electricity market — in the same way as very high prices at times of extreme scarcity are also natural.
"They are meant to encourage some generators to withdraw supply and/or energy users to increase consumption," Mr McArdle said.
"When you have a market where supply and demand need to be balanced in real time; and such a variability through the day and year and in demand and then layer on intermittency in supply, we shouldn't panic when it happens — we just need to be smarter in dealing with demand.
"The two renewable technologies that are the lowest cost are also intermittent, we should expect more volatile price ranges in the future.
"What we're seeing now is just the start," Mr McArdle says.
So are renewables the cause?
Coal is still the dominant driver of electricity generation, accounting for around 80 per cent of all power produced, not only in New South Wales and Victoria, but sun-drenched Queensland as well.
Mr O'Neil doesn't subscribe to the "new solar generation floods the market, driving electricity prices to zero and below" school of thought.
"So solar 'flooding the market' is a slight overstatement, and just as in other markets, electricity prices reflect how all participating generators in the NEM, not just the new entrants, decide to offer their production, relative to the level of demand," he says, pointing out that during the period of negative prices in Queensland recently, coal burners were still churning out two-thirds of the state's power needs.
"With maximum solar output — including rooftop PV — peaking at around one-third of all production in Queensland during the middle of the day, that leaves the bidding behaviour of the dispatchable generators supplying the other two thirds at least as responsible for those zero and negative prices."
Mr O'Neil says while generators keep details of their margins tightly held, on his analysis if Queensland's coal-fired generators wanted to avoid or minimise recurring negative spot prices, they could simply dial down the volumes during the day, as they sometimes do during the night, while still dispatching above technical minimum generation levels.
The fact they haven't adjusted their bidding for very low or negative prices may seem counterintuitive. That is, Mr O'Neil says, unless you take into account that biding behaviour is not only influenced by spot prices but hedging positions as well.
"A generator which has sold electricity swap derivatives exceeding its physical dispatch volume has a net financial position similar to a buyer in the spot market, and actually gains as spot prices fall," he says.
Is it sustainable?
The sustainability of industry players in such a volatile market will ultimately depend on how they respond to the challenges.
"These prices are sending a signal that the type of generation we will need has to be far more flexible," Mr O'Neil says. "There needs to be less incentive to run flat chat when the demand is not there."
"That means a portfolio of generation; adding more storage as well as gas, and perhaps liquid fuel, that can be run infrequently and doesn't cost as much as coal and nuclear to build and run."
Mr McArdle agrees, arguing many newer solar entrants have been slow to realise they need to turn off sometimes.
"Some new entrant generators have been 'caught swimming naked' — at least in part because, they have been paid to remain naive by an incentivized focus on 'Anytime/ Anywhere Energy'," he says.
Green Energy Markets' Tristan Edis says the volatility, and particular the realisation that wholesale prices can dive deeply negative during the optimum time for solar generation, has already caused a dramatic slowdown in building new projects.
"We're already seeing it," Mr Edis says. "This year to date we've seen [a commitment for] just 14MW of new solar in Queensland; in 2018 it was 675MW, in 2017 it was 1,418MW."
"We're finally seeing the impact coming through in prices that was delayed by the Snowy [hydro scheme] running out of water; there's so much extra supply coming through, it should have an impact on prices."
The only trouble is, that relief may still be a year or two, or three, away.
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