Revitalising the wind power induced merit order effect to reduce wholesale and retail electricity prices in Australia

Abstract

This paper investigates the effect of increasing the number of wind turbine generators on wholesale spot prices in the Australian National Electricity Market's (NEM), given the existing transmission grid, from 2014 to 2025. We use a sensitivity analysis to evaluate the effect of five different levels of wind power penetration on prices, ranging from Scenario A, 'no wind', to Scenario E that includes existing and planned wind power sufficient to meet Australia's original 2020 41TWh Large-scale Renewable Energy Target (LRET). We find divergence in prices between states and similar prices for nodes within states. This supports the Garnaut Climate Change Review assessment on the prevalence of 'gold-plating' the intrastate transmission network and underinvesting in interstate connectivity. We find increasing wind power penetration decreases wholesale spot prices but that retail prices have increased in deregulated South Australia and Queensland, similarly, in Victoria. We argue that there is a pressing need to split the large generator-retail companies into separate retail and generator companies and to reassess regulatory rules more generally. Interconnector congestion limits the potential for wind power to further reduce wholesale prices across the NEM. So the need for a high capacity transmission backbone in the NEM is becoming clearer and will become pressing when Australia moves beyond its current 2020 LRET.

On the Stability of Energy-Only Markets with Government-Initiated Contracts-for-Differences

“…High levels of VRE shielded by CfDs and priority-dispatched will initially place downward pressure on price [14,24,39,40]. Given negligible marginal running costs, these so-called merit-order effects arising from policy-induced VRE plant entry became apparent in markets such as Germany as early as 2008 [41] and had been prominent in the SA region of the NEM [42][43][44][45]. Consequently, market values of incumbent VRE (and future) plant will be adversely affected from a stream of continual entry through a combination of production "correlation effects", "merit-order effects" and "price-impression effects" [24,35,37].…”

Climate change policy discontinuity and its effects on Australia's national electricity market

“…small business and households (Buckman & Diesendorf, ). Any merit‐order effects arising from renewable plant entry would thus benefit EITE firms disproportionately (Bell, Wild, Foster, & Hewson, , ; Forrest & MacGill, ).…”

“…Carbon pricing or emissions trading schemes (ETSs) levied on generators (Freebairn, 2014;Garnaut, 2014); 3. Government initiated contracts-for-differences (CfDs) funded by taxpayers or electricity consumers (Bunn & Yusupov, 2015;Kozlov, 2014;Wild, 2017); and 4. Distributed energy resource (DER) policies, such as solar feed-in tariffs (Nelson, Simshauser, & Kelley, 2011, Pollitt & Anaya, 2016.…”

“…wind and solar) had stalled throughout 2014-2016 due to RET policy discontinuity, while cleaner burning flexible gas-fired generation plant was not entering at all. On the contrary, semi-baseload CCGT plant was being withdrawn due to critical conditions in the gas market (Apergis & Lau, 2015;Bell et al, 2015Bell et al, , 2017Forrest & MacGill, 2013;Simshauser & Nelson, 2015). The anatomy of the unfolding energy crisis can be traced back to climate change policy discontinuity a decade earlier.…”

Garbage can theory and Australia's National Electricity Market: Decarbonisation in a hostile policy environment

“…forcing more intermittent capacity into an increasingly oversupplied and unstable wholesale electricity market while associated REC certificate costs were levied on consumers (at the retail level). This was occurring at a time when residential electricity tariffs and network charges in particular were rising sharply (Simshauser et al 2011;Cludius et al 2014;Garnaut, 2014;Nelson et al 2015;Bell et al 2017). The RET was once again fundamentally alteredscaled back from 41000GWh to 33000GWh in mid-2015 (Biggs, 2016).…”