The events leading up to the recent market suspension in June have highlighted the role that peaking gas-fired generation plays in satisfying demand and setting prices across the NEM in the morning and evening peak periods.
The team recently explored some of the drivers and effects of these events in detail in Cotw 139, Cotw 141, and Cotw 144 concerning the link to international gas prices, higher gas output, and the elevated gas captured price in recent times. While other factors also contribute to high spot pricing (e.g. market constraints, coal output ramping, variable renewable generation (VRE) etc.), it has been evident that the elevated short-run marginal cost (SRMC) of gas generation has been influential in setting the spot price at high levels during and since the market suspension.
This Chart of the week explores how peaking gas generation has influenced wholesale prices since the market suspension was lifted and how much flexible generation could be needed to displace and reduce the NEM’s reliance on peaking gas into the future.
In Figure 1, the average daily profile of wholesale energy value (the spot price multiplied by net generation output) in the four mainland NEM regions is charted (shaded areas) from 10 July to31 August 2022, which is a few weeks after the resumption of normal trading. ‘Peaking’ gas generation output across this period is overlaid (dashed lines), with the baseline set at the minimum overnight gas generation output (around 03:00-04:00) in each NEM region. Output above this level can be loosely defined as the ‘peaking’ gas generation required to satisfy peak demand in the morning and evening.
In this period, the wholesale energy value averaged $126.6m daily across the four regions. Gas generation has captured $16.3m or 12.9% of the daily average value, based on only 8.2% of the total MW generation output, indicating that gas is capturing higher prices than other fuel types.
It can be seen that the wholesale energy value is much higher in the evening and morning peaks than during the middle of the day (when solar output is highest) and the early morning (when demand is at its lowest). Energy value also correlates with gas generation output, such that gas has captured 17.8% of the market value in the 18:00 30-minute interval in these last two months, from 14.7% of the generation share in this time.
As the value of energy served to the market is over three times higher in the evening peak than the overnight minimum, there could be value in reducing the peak dependence on gas with some alternative form of flexible dispatchable energy generation. For each of the mainland NEM regions, the capacities needed are given in Table 1 and are comparable to the sizes of the largest existing gas generators in each of these regions.
There are a number of options for alternative energy generation sources that could replace gas, but not all of them can address the challenge adequately:
- Solar power is not available at the morning or evening peak demand times and instead contributes to the depression of midday demand and the rapid ramping up of evening peak demand.
- Wind power can assist in providing generation through peak periods, but its day-to-day variability can pose a challenge during days of below-average wind output. This is evidenced by the events of 26 August in South Australia, where a near complete lack of wind output (and constrained imports from VIC) between 06:30 – 08:30 saw prices spike to over $12,900/MWh for most of this period, with gas making up ~85% of generation in SA in this time. This resulted in $35.8m of revenue going to gas generators or 33% of the total energy value of the morning peak in SA in these two months.
Instead, the flexibility of battery energy storage could be a good substitute for peaking gas, with the ability to dispatch and ramp up nearly instantaneously. To be able to completely replace 600-900 MW of gas through the evening peak (16:00-00:00) period each day, there would need to be approximately 5-6 hours of energy storage duration available (and fully charged from midday VRE at lower prices) in each region (see Table 1). If the batteries can cycle up to twice per day, they could also recharge overnight to be ready for trading through the morning peak period.
It should be noted that the total capacity of any new fleet of batteries will need to be larger than the values in Table 1, as wholesale energy arbitrage is not the only revenue source for batteries. At any time, capacity can and should be expected to be reserved for FCAS provision, even through the peak demand windows, as significant revenues can be found from short spikes in Contingency FCAS requirements and from more regular provision of Regulation FCAS.
It is important to recognise that until the installed capacity of battery reaches these levels to displace peaking gas completely, then gas will remain as the price setter for the market at the SRMC of gas-fired generation plants, and battery storage may not have the power to influence the price as significantly.
If gas prices remain elevated for an extended period, this will likely incentivise new battery projects to be built while high arbitrage opportunities exist, up to the point where peaking gas is fully displaced, and firming VRE becomes the more important purpose of batteries.
Our Benchmark Power Curve price forecasts can assist you with predicting the impact of these effects on the future generation mix in the NEM. If you would like further information, please contact us at enquiries@cornwall-insight.com.au.
