Australia’s electricity market “most volatile” in world, as clunky coal clashes with solar

Unplanned outages across Australia’s increasingly unreliable fleet of ageing coal power plants and extreme weather events are helping to make Australia’s electricity market the most volatile in the world, new research from Rystad Energy has found.

Rystad Energy says a comparison of 39 electricity markets globally reveals that Australia’s NEM has the widest spreads between high and low wholesale electricity prices over the course of each day, giving it “the unwanted title of ‘most volatile’.”

Rystad says it measures volatility using the average one-hour intraday spread for a year of data – that is, the difference between the highest and lowest wholesale price during a given hour.

On this metric, Australia’s National Electricity Market (NEM), which interconnects Queensland, New South Wales, Victoria, Tasmania and South Australia is shown to have the most fluctuations in daily prices of any system worldwide.

Rystad says this is driven by significant supply issues, including unplanned coal power plant outages or transmission line problems caused by natural disasters such as cyclonic winds or bushfires, which have become “more frequent and devastating” in recent years.

Extreme price fluctuations are also connected to Australia’s world-leading solar power penetration – largely from household rooftop systems – which pushes prices down during the day, increasingly sending them into negative territory.

This phenomenon is also illustrated in the Australian Energy Market Operator’s latest Quarterly Energy Dynamics report, published on Monday, with negative price events across the NEM reaching their highest ever levels during the third quarter of 2023.

AEMO says negative or zero price occurrences – caused by growing rooftop solar output and higher grid-scale solar supply wiping out huge chunks of daytime operational demand – more than doubled over the period, year on year.

The report shows all NEM regions saw increased negative price occurrences over the quarter, averaging out to 19% of all dispatch intervals – a new high.

South Australia topped the list for negative pricing at 25% of intervals, “driven by extremely low daytime operational demands … reflecting increased installed capacity of distributed PV in the state.”

Victoria and Queensland both reached 23% negative price occurrence in Q3 2023, followed by Tasmania and New South Wales which saw negative prices in 17% and 9% of intervals respectively.

The trouble with this is that when the solar leaves the system in the evenings, as the sun goes down, costly coal and gas generators jump back into the mix, causing prices to soar.

Coal plants, in particular, are unsuited to this sort of demand profile – particularly as they edge closer to their use-by dates – lacking the flexibility to jump in and meet any gaps in demand as they are needed.

The answer, says Rystad’s Dixon, is more storage and other energy market infrastructure that will optimise the use of power generated from solar and wind, shifting it to where it is needed, when it is needed.

“Volatility can be unsettling for retailers who lack proper hedging strategies and for consumers who bear the brunt of resulting cost fluctuations,” says Rystad Energy senior analyst David Dixon.

“To tackle this, Australia should prioritise the enhancement of transmission infrastructure and invest in storage solutions to mitigate the impact of volatility.

“This will help to create a more stable and affordable electricity market for all Australians,” Dixon says.

Volatility aside, AEMO’s QED report shows that growth in renewables over the past year has helped to send wholesale electricity prices tumbling from their 2022 peaks, and coal output to record lows.

The report published by AEMO on Monday, credits wind and solar for the 71 per cent fall in wholesale electricity prices from the same period last year, and particularly the ability of solar to wrest control of price setting from expensive fossil fuel generators in the middle of the day.