On the impact of increasing penetration of variable renewables on electricity spot price extremes in Australia

Abstract

In energy-only electricity markets, such as Australia’s National Electricity Market (NEM), it has been argued that an increasing penetration of variable renewable energy (VRE) generation is likely to have two effects: (i) more extreme spot prices, with greater instances of both very high and very low prices and (ii) a need to increase the market price cap (MPC) and related price signals for reliability. This article examines the validity of both these effects using spot pricing outcomes in South Australia (SA), which has one of the highest VRE penetrations worldwide. We find partial support for these two effects. While extremely low prices have become more frequent over time, extremely high prices have become less frequent. Spot price volatility has risen, consistent with the hypothesis, but not because prices have become more extreme. Furthermore, these findings are observed for prices in all NEM regions, not just SA. Also, reliability has remained high over the past decade despite the MPC remaining constant in real terms. We provide four reasons why higher VRE penetration need not result in more extreme prices and higher MPCs: (i) greater investment in volatility-dampening, reliability-enhancing technologies like storage and interconnectors; (ii) increased contract cover; (iii) more price-responsive demand; and (iv) emergence of additional ancillary service revenues. These findings have implications for the durability of the NEM’s energy-only design given expected further increases in VRE penetration rates across the NEM.