A lot has been written recently about how the energy transition is lagging behind the required installed capacity needed to deliver on our net-zero future. We also know that the connection of new generation requires significant investment into additional transmission infrastructure (or other non-network solutions) and that this needs to happen quickly before we see more significant curtailment or increasingly non-economic flows from constraints.
In this Chart of the week, we look at the importance of interconnection by reviewing the changes in flows between VIC and NSW in quarter one over the past three years.
The ‘interconnectedness’ of regions within the NEM has been a huge focus of AEMO’s Integrated System Plans in furthering a diversity of resources to provide support to adjacent regions, resulting in the more efficient use of renewables across the NEM. The ISP has endeavoured to accelerate interconnector development and provide a baseline for both assessing and demonstrating their importance to the future of the NEM. Unfortunately, this build-out has not come quickly enough, and we are continuing to see renewables locked into regions unable to be delivered to where they are needed most. More interestingly, instances of generation counterflows are increasing, most recently across the VIC-NSW interconnector.
In the space of only two years since 2021, Victoria, traditionally a large net energy exporter into NSW, has had Q1 net exports drop by 44% in 2022 and 75% in 2023 (as of the end of Feb) compared to 2021. We can see this decline in Figure 1 below, which depicts the average time of day MW flows on the VIC-NSW interconnector and the maximum export limits. We can clearly see that flows during the middle of the day have decreased significantly, along with a sharp drop in the export limits since Q1 2021.
We have seen this occur primarily because of the X5 constraint. The constraint has been limiting flows north on the VIC-NSW interconnector as solar generation increases in the southwest NSW and northern VIC regions. The binding of this constraint has been primarily due to Limondale and Sunraysia solar farms, which began full operation in late 2021 and early 2022, respectively. We can see in Figure 1 that in Q1 2022, there was a significant drop in export from VIC into NSW when these solar farms were commissioned, understandably, as they amount to more than 400MW of additional generation during the day. In Q1 2023, on average, the MW export limit on the interconnector has been negative between 9am and 1pm (forcing imports into Victoria from NSW). As a result, prices in Victoria have been, on average, negative across these periods as well. This has led to a differential in price between VIC and NSW in the middle of the day of ~$67/MWh. Furthermore, a significant amount of negative settlement residues have accrued, which is not an economically efficient use of the network and capacity. Those solar farms in NSW that contribute to the X5 constraint binding are capturing much higher prices in NSW than should realistically be occurring, given that plenty of VIC generation should be able to drive down midday NSW prices.
As a result of the limited ability of the VIC-NSW interconnector to provide support to NSW in Q1, NSW is now relying much more heavily on the NSW-QLD interconnector during the day as imports into NSW from QLD have increased from ~100MW in 2021 to 300MW in 2022 and ~500MW in Q1 2023. These flows are to be expected, given midday prices in QLD are lower than NSW (but not lower than Victorian midday pricing). Similarly, Q1 2023 evening peak prices in QLD (~$300/MWh) are around double the NSW evening peak price.
The Victorian big battery was designed to allow for increased imports across the interconnector from NSW into Victoria. However, as we can see in Figure 1 for the two most recent summers, this hasn’t really had the desired effect given that 1) Victorian imports from NSW into VIC have been minimal and 2) for a substantial number of periods when this has occurred in the middle of the day it has been at counter-price flows. To be fair, this battery is designed as a contingency for those instances where something goes wrong. However, we really haven’t seen the benefit of this investment in opening up increased import capacity due to these system strength constraints binding more often. Given that the new System Strength rule change has been finalised and the TNSPs have now published the first system strength connection cost prices, we can hope that the instances of these system strength constraints binding in the future will hopefully be less prevalent.
The X5 constraint is set to be alleviated through Transgrid’s new 330kv line between the new Dinawan substation and Darlington Point. The new Dinawan substation is set to be commissioned before the summer of 2025/26 as part of Project EnergyConnect. There is more to do, and the states may have their own plans for additional infrastructure development. There is a balance to be struck between overbuilding required infrastructure and over-analysing the most optimal solution where delayed action ends up resulting in additional costs to customers anyway. It is a tough balance, but we are fast approaching the time for significant action to approve new infrastructure and give certainty to new project developments.
Cornwall Insight Australia publishes a quarterly Energy Market Perspective that analyses market trends (such as interconnector flows) to help market participants and investors make better decisions. Please contact Mohsin Ali for a free demonstration of this report.
