Welcome to the NEM: It's going to be messy.

There are four clearly distinguishable structural drivers behind the increasing price volatility in the NEM: a) the rise of renewables; b) the uptake of rooftop solar; c) the disorderly exit of coal - and uncertainty around it moving forward; and d) the subsequent pressure on the transmission grid of all of the above, reflected in numerous constraints on the dispatch algorithm yielding extreme price outcomes. All are prime exemplars of the complexity and inherent volatility behind the energy transition - hence, one can only predict that the transition will continue to have unexpected and, at times, undesirable outcomes. 

Solar and wind are the fastest electrons being delivered in the history of electricity markets. In the Australian context, the period between 2016 and 2021 brought 25 GW of VRE capacity into the market, which by any standards is a substantial magnitude of new generation. A comparable amount of solar rooftop (today around 22.5 GW)makes Australia a global leader by many metrics. Both of these developments also brought challenges to the grid's capacity and stability. Any engineer will agree on the complexity behind the loss of inertia, degradation of power quality, frequency management and the implementation and enforcement of standards. Transmission links already show signs of congestion and the NEM's stringy grid, pone to economic islanding, 

Solar flooding into the grid has established a dive in prices, even taking them into negative territory. Today, QLD, SA and VIC experience negative prices for the majority of midday hours(9am-3pm). In SA, on average, over 60% of midday price periods are negatively priced. This is a drastic change, up from 20% in 2020-21, and it is part of adynamic that sets the conditions for "peakier peaks" of evening prices. In addition, we see an ageing coal fleet with increasing reliability issues creating unpredictable supply shortfalls that exacerbate short-term volatility. Uncertainty around its exit from the market adds a layer of uncertainty on the prevalence of volatility in the longer term. 

The result of these key developments: once predictable price patterns are disrupted and become increasingly less so. From a market development perspective, price volatility isn't a bug of the energy transition, neither of the NEM's energy-only design - it is certainly a feature that brings an opportunity for market transformation. Price volatility highlights the location and magnitude of opportunities for storage, demand-side participation, and grid augmentation. Nonetheless, it is certain that market transformation, which brings favourable outcomes for market participants and consumers, needs policy and market operations to evolve. In other words, the market should embrace volatility.

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Next week, we will dive into some interesting figures and characteristics on negative prices. For now, we will leave some more food for thought (and weekend conversations):

-         Is price volatility something that needs to be fixed?

-         Assuming too much of something is never good, what is the (buzzword alert!) low hanging fruit in lessening price volatility?

-         Where are prices in the NEM heading in the medium term (5-10 years)? Will negative prices still be the midday norm? Will BESS behead the duck?