What's driving the rise in wholesale electricity prices in the NEM?

09 Dec 2015Archived News Mark Asbjerg Climate Change Matters

The ongoing El-Niño event in Australia combined with recently announced power generator closures have placed significant upward pressure on wholesale electricity prices across the National Electricity Market. 

On 10 November 2015 the Bureau of Meteorology (BoM) released an update of its El Niño–Southern Oscillation (ENSO) tracker, confirming a persistent El Niño climate event over much of eastern Australia. Such El Niño periods are generally associated with a greater risk of successive hot weather events, which impact the volatility of electricity spot markets.

The risk of such pricing volatility is being incorporated into all electricity futures contracts and is increasing prices significantly in the near-term. These increases are illustrated in the figure below.

 

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In addition to the over-arching effect of El Niño on current prices, each region in the NEM has also been subject to its own unique set of price drivers.

In South Australia; the announced closure of 786 MW of coal-fired generation on 31 March 2016 has driven prices up, as a shortage of controllable generation is expected to create intermittent supply shortages. High levels of installed wind capacity create significant levels of generation/price volatility when there is low wind output, and South Australia will most likely need to import additional electricity supply from Victoria.

In Queensland, the combination of high level of gas generation and the emergence of the export LNG industry have put upward pressure on prices, as domestic wholesale gas prices compete with international prices.

In New South Wales, the decline in manufacturing combined with oversupplied capacity has resulted in reduced pricing volatility.

In Victoria, similar declining demand and oversupplied capacity to NSW has led to reduced pricing volatility. It is expected that part of this will be offset by the likely increased demand from South Australia.

In Tasmania, decreased demand has resulted in oversupplied capacity and a declining trend in electricity prices.
Whilst each of these regional drivers influences electricity prices, it is primarily the market’s reaction to the ongoing El Niño event that has served to drive prices upwards across each of the NEM states. The BoM has stated that all models are indicating a marked decline in El Niño throughout the first quarter of 2016, after which is expected that electricity prices will return to more long-term trends.

 

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