Renewables relieve price pressure as AEMO brings market back with training wheels

Australia’s National Electricity Market was put back in operation on Thursday morning – albeit with a new set of training wheels – as the market operator tested whether the NEM could function properly without repeated interventions to keep the lights on.

The week-old suspension was partially lifted by the Australian Energy Market Operator at 4.05am AEST – the first five minute trading interval – and is due to be lifted in full at the same time on Friday if AEMO is satisfied that the market can work as normal.

The suspension was imposed last week after soaring coal and gas prices fed through to the grid and went out of control, triggering an automatic price cap. But this caused even more chaos as generators withheld capacity, forcing AEMO to direct up 5GW of capacity to be switched on at times to avoid blackouts.

The actions of some generators will be the subject of investigation by various authorities, who will look at whether they were seeking to “game the system”, arbitraging between two different compensation mechanisms.

The big question for AEMO, regulators and the market is whether the prices will now return to the high levels seen before the suspension. Gas prices remain high, but a number of coal generators that were out of the system a week ago have now returned to service, meaning less gas may be required.

Much will depend on generator bidding behaviour, and it wouldn’t take much – given the high gas prices – to push the market back over the cumulative threshold that would trigger another price cap.

The long term solution, of course, is to build more renewables and storage.

Indicative prices in all four mainland states in the NEM soared in the early morning on Thursday – to more than $1,200/MWh and more than $600/MWh respectively in Queensland and NSW, the two most coal dependent states.

They also jumped to more than $500/MWh in Victoria and more than $400/MWh in South Australia in the morning peak.

However, once there was enough renewable generation, particular solar, to wrestle pricing control away from the gas generators, the prices quickly fell – to lows of around zero in Queensland and Victoria, and to as low as minus $90/MWh in South Australia, where wind and solar reached 120 per cent of local demand.

The price falls were more moderate in NSW, falling only to around $108/MWh, where the share of renewables hit a maximum 33 per cent. The share of renewables in the NEM overall reached 52 per cent, but needs to be significantly higher to successfully dilute the inflationary impact of expensive gas.

Importantly, the amount of “available” capacity increased, and returned to “normal” levels in states like NSW, according to energy analyst Dylan McConnell. NSW had suffered the most last week from coal generator outages.

“The amount of generation made available to market looks better,” McConnell tweeted. “(I) reckon that must give AEMO a bit more confidence on market restart.”

There were, however, a few issues with the return of the NEM dispatch system. AEMO warned of incorrect prices in the very early morning, and clearly had problems for a while with the separate FCAS market, which provide frequency control that can respond to sudden gyrations in output or demand.

AEMO did not provide any comment before publication, apart from saying (after publication) that it continues to monitor and assess if it will lift the suspension.

The focus over the next few days will be on supply and prices – particularly in Queensland and NSW, where wholesale prices run the greatest risk of being trapped by gas generators that still face a marginal cost of generation of at least $400/MWh, due to the high cost of gas. And they like to make a profit above that.

However, South Australia also faces a potential supply crunch a week from now, with AEMO issuing various “lack of reserve” warnings. These are its first call for a response from the back up fleet of gas generators.

It is clear, however, that the government and regulators have been reading the riot act to the generators, as much as they can.

“We have got to be clear that the main thing causing this crisis was unscheduled coal-fired power generation closures, now that doesn’t mean decision by generators to close, it means they broke down in most instances,” energy minister Chris Bowen said on TV on Thursday morning.

“We had flooding in coal mines, we had problems of supply of coal to coal-fired power stations and we had unscheduled outages as well as some planned outages for maintenance and then in addition the Australian Energy Regulator had to make very clear to the generators their obligation under the law.

“The energy regulator has my full support in any action she has had to take or will have to take. So generators have responded to be clear. Whenever we have been on the phone to them saying we need more supply they have responded well and I have a speaking regularly to them.

“AEMO has been in constant contact with them and the energy regulator has also been reminding them of their obligations under the law which we expect as the government for them to comply with ….. Sometimes the regulator has to remind people of what the law says.”

If wholesale prices again breach the cumulative sum of $1.359 million over a week (2016 pricing periods), then the automatic price cap will be triggered again, and the market could see a return to the game of chicken where generators wait to be instructed to switch on. Or AEMO can simply suspend the market again.

Developers of new wind and solar projects will be hoping not. The labour-intensive management of a suspended market has forced AEMO in turn to suspend some commissioning and approvals, to the frustration of some developers keen to add capacity and output to the grid.

However, there are also long term issues facing the rollout of renewables and storage at the scale required – even to match Labor’s new goal of reaching 82 per cent renewables share by 2030.

This includes market rules that often complicate or impede their installation, enough transmission capacity to connect them to the grid, supply chain problems, and potentially a new “capacity market” that – contrary to the wishes of nearly everyone in the energy market – will direct additional revenue to coal and gas plants.

“Australia’s got an enormous job to do in connecting new generation sources, particularly solar and wind as well as battery storage,” AEMO CEO Daniel Westerman said on Wednesday.

“Actually, over the last 12 months, we’ll have connected 4,000 megawatts of solar and wind projects and by the end of this calendar year, hopefully, 5,000 megawatts.

“Yes, we might have had a delay in the last couple of days while we’ve focused on keeping the grid secure for Australian homes and businesses, but our priority will be to continue to connect those new generation sources at pace.”

See also: Why the ESB’s “capacity mechanism” will make Australia’s energy crisis worse

And: Chris Bowen needs flexibility to avoid capacity market trap set by fossil fuel lobby