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On the impact of increasing penetration of variable renewables on electricity spot price extremes in Australia

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  • Rai, Alan
  • Nunn, Oliver

Abstract

In energy-only electricity markets, such as Australia’s National Electricity Market (NEM), it has been argued that an increasing penetration of variable renewable energy (VRE) generation is likely to have two effects: (i) more extreme spot prices, with greater instances of both very high and very low prices and (ii) a need to increase the market price cap (MPC) and related price signals for reliability. This article examines the validity of both these effects using spot pricing outcomes in South Australia (SA), which has one of the highest VRE penetrations worldwide. We find partial support for these two effects. While extremely low prices have become more frequent over time, extremely high prices have become less frequent. Spot price volatility has risen, consistent with the hypothesis, but not because prices have become more extreme. Furthermore, these findings are observed for prices in all NEM regions, not just SA. Also, reliability has remained high over the past decade despite the MPC remaining constant in real terms. We provide four reasons why higher VRE penetration need not result in more extreme prices and higher MPCs: (i) greater investment in volatility-dampening, reliability-enhancing technologies like storage and interconnectors; (ii) increased contract cover; (iii) more price-responsive demand; and (iv) emergence of additional ancillary service revenues. These findings have implications for the durability of the NEM’s energy-only design given expected further increases in VRE penetration rates across the NEM.

Suggested Citation

  • Rai, Alan & Nunn, Oliver, 2020. "On the impact of increasing penetration of variable renewables on electricity spot price extremes in Australia," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 67-86.
  • Handle: RePEc:eee:ecanpo:v:67:y:2020:i:c:p:67-86
    DOI: 10.1016/j.eap.2020.06.001
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    Cited by:

    1. Nelson, Tim & Rai, Alan & Esplin, Ryan, 2021. "Overcoming the limitations of variable renewable production subsidies as a means of decarbonising electricity markets," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 544-556.
    2. Alina Wilke & Zhiwei Shen & Matthias Ritter, 2021. "How Much Can Small-Scale Wind Energy Production Contribute to Energy Supply in Cities? A Case Study of Berlin," Energies, MDPI, Open Access Journal, vol. 14(17), pages 1-20, September.
    3. Yasir Alsaedi & Gurudeo Anand Tularam & Victor Wong, 2021. "Impact of the Nature of Energy Management and Responses to Policies Regarding Solar and Wind Pricing: A Qualitative Study of the Australian Electricity Markets," International Journal of Energy Economics and Policy, Econjournals, vol. 11(3), pages 191-205.
    4. López Prol, Javier & Schill, Wolf-Peter, 2021. "The Economics of Variable Renewables and Electricity Storage," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242463, Verein für Socialpolitik / German Economic Association.
    5. Utama, Christian & Troitzsch, Sebastian & Thakur, Jagruti, 2021. "Demand-side flexibility and demand-side bidding for flexible loads in air-conditioned buildings," Applied Energy, Elsevier, vol. 285(C).
    6. Gholami, Mina Bahrami & Poletti, Stephen & Staffell, Iain, 2021. "Wind, rain, fire and sun: Towards zero carbon electricity for New Zealand," Energy Policy, Elsevier, vol. 150(C).
    7. Javier L'opez Prol & Wolf-Peter Schill, 2020. "The Economics of Variable Renewables and Electricity Storage," Papers 2012.15371, arXiv.org.

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    More about this item

    Keywords

    Ancillary services; Energy-only electricity market; Variable renewables; Reliability;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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