Welcome to the NEM: The world’s most volatile market

There is no doubt there is a of gold rush for storage in the NEM. In little over 5 years, more than 6GW of capacity have entered the market, with that number set to multiply by factors between 9x to 12x if the project development pipeline comes online.

What has driven this trend?

Welcome to the NEM: the most volatile electricity market in the world. The NEM’s unique topology and market design, the rise of renewables, and certainly, the energy policy rollercoaster – e.g. the uncertainty and disorderly exit of coal generation – contribute to increasingly extreme price outcomes: negative prices, price spikes, and overall price volatility. The price variance in the NEM is around 20% to 30% above ERCOT, another dynamic market with high renewable energy penetration and substantial amounts of fossil-fuelled generation.

Much is discussed about the need for market reform in the NEM to accommodate the new paradigm of electricity systems. The argument goes that price volatility signals the short-term supply-demand imbalances but fails to incentivise long-term investments (pumped-hydro, anyone?). Capacity mechanisms such as the CIS highlight the need, and appetite, for long-term signals and policy guidance. Moreover, is volatility good or bad? It is certainly likened to price uncertainty, which can hinder the business cases of new entrants to the market. Therefore, one could argue that utilities/IPPs, retailers, investors, and ultimately, consumers, are affected by an increase in the magnitude and frequency of extreme price outcomes.

Whether the answer lies in renewable portfolio standards or capacity markets, there is no doubt that the NEM's unique market design is bringing green fields for BESS deployment. Significant amounts of capital are being deployed at trepid pace and the theses of renewable grids firmed by storage capacity, are, and will be, put to the test. This entails numerous engineering, economic and policy challenges, anything from grid integration, co-location/hybrid systems, to the value of flexibility, and algorithmic trading.

Over the next few weeks, we will dive into the features of the NEM's current price dynamics and insights into the implications for BESS operations and performance.

Until next time, we leave some food for thought:

- Volatility had been largely (inherently) seasonal; now it is a daily reality. What changed?
- Does NEM's volatility benefit or hinder market efficiency?
- Will the Nelson Review (or a new government?) finally bring a capacity market (or a version of it)?

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