Record electricity prices driven by extreme weather

Record electricity prices driven by extreme weather, generator outages and aggressive patterns of generator bidding behaviour, outlines ERM Power EGM Trading David Guiver.

Forward contract prices escalating: high pool prices, as a result of recent events, have led to higher contract prices for commercial and industrial customers. Unpredictable market behaviour highlights the importance of good energy management strategies for large power consumers in a volatile energy market and policy environment.

Much has been written about the extreme pool price volatility that occurred in Victoria and South Australia last week. A near perfect storm unfolded in Victoria last Thursday and Friday (24 & 25 Jan) causing load shedding, triggering of the reliability and emergency reserve trader function and resulting in the breaking of electricity pool price records across the southern mainland States.

With three large baseload generation units offline in Victoria for maintenance and state electricity demand exceeding 9,000MW due to high temperatures across the south-east, two large generation portfolios elected to offer volume at prices above $14,000/MWh causing an extended period of extreme high prices (see Fig 1).

It was somewhat surprising to see these levels of aggressive bidding behaviour, considering the political and regulatory intervention currently being placed on the market.

Fig 1

Record electricity prices - 24 Jan 2019

Daily historical pool price records dating back to 2000 were decimated (see Fig 2) on the Thursday in both Victoria and South Australia, and the continuation of high prices throughout mid-morning on Friday saw the Administered Price Cap (APC) invoked (in both States) for only the fifth time in the history of the National Electricity Market (NEM).

Fig 2

Record NEM Settlement Events

Record electricity prices - NEM Settlement Events

The APC limits pool prices to $300/MWh for a minimum of seven (7) consecutive days, and regular pricing is only reinstated once the seven-day average recedes below $216,900.

When APC is in place, two key factors come into play.

Firstly, AEMO publish two market prices, the regional reference price (RRP) continues to be published (capped at $300/MWh) and a shadow price known as the regional original price (ROP) which is the price that the market would have settled at if the $300 price cap was not in place. The ROP is used to calculate the rolling seven-day price average in order to determine when the $300 price cap should be lifted.

The other key factor is the influence the APC has on pricing in adjacent States. If for example, the APC is invoked in Victoria, then any period that Victoria imports electricity from NSW, then NSW prices will also be capped at $300/MWh. This particular market phenomenon played out this week.

Despite hot weather conditions in both Victoria and NSW, and pool prices forecast to exceed $14,000/MWh in NSW, generation was generally bid in a manner that caused electricity to flow from NSW to Victoria. Generation output was able to be lowered in Victoria without risk of extreme prices (due to the $300 price cap), forcing imports from NSW and thus also capping NSW prices at $300/MWh. Again it was somewhat surprising to see one of the large hydro facilities in NSW rebid capacity (see Fig 3) which resulted in a reversal of flows across the interconnector causing multiple high price events in NSW on Tuesday.

Fig 3

Record electricity prices - Total Capacity 2465MW

Another consequence of high pool prices is the flow on effect to contract prices. Figure 4 below shows the rapid shift upward in forward prices as a response to pool price outcomes on Tuesday, and Wednesday’s data shows a slight retracement when pool price volatility didn’t eventuate on the following day.

Fig 4

Record electricity prices - 2019 and 2020 Contract Prices

Renewables and Storage

As the NEM undergoes a difficult transition away from baseload fossil fuels to a mix of renewables, gas generation and storage, we thought we’d take a look at how the Hornsdale wind and battery facility fared over the two volatile days, as depicted in Fig 5. The chart below shows the battery (red bars) being charged in the early hours of Thursday morning when wind production (green bars) was high. As high prices (red line) commenced the battery began to discharge, averaging almost a full 30MW for the first three hours of the five and half hour price event. We were surprised to see the battery drawing over 5MW during the final hour of high prices. As high prices dissipated and wind production increased the battery also increased its recharging readying itself to respond to the following day’s price events.

Fig 5

Record electricity prices - Total Capacity 413MW