Why negative wholesale prices may be more bad news for energy customers

Written by Energy Action

Wholesale prices are falling below zero across the National Electricity Market (NEM) more frequently, as solar and wind generation outpaces demand. But what’s driving this and how does it impact the cost of energy more broadly?

What’s driving sub-zero prices

In the past few months a number of renewable energy projects have come online, including solar and wind projects such as Haughton Stage 1, Numurkah, Coopers Gap and Murra Warra. Weather conditions have also been more regularly conducive to solar and wind generation at certain times of the day leading to high supply levels.

With the increasing amount of renewable generation, supply can run ahead of demand and at those times generators are forced to lower the prices they are offering for energy on the spot market. This can drive the price to zero or below, which has occurred in all markets across the NEM at various times, and simultaneously across all states in late July.

These instances are often seen only during single five-minute dispatches and while they have garnered a lot of attention, significant price spikes during periods of high demand are much more common. Volatility in the spot market is also intensifying with prices swinging more dramatically. This may well continue into the summer, with imminent hotter, sunnier weather driving both demand for electricity and greater solar output.

The impact of negative prices

Whilst negative prices are good news for the few customers with spot exposure, the majority of customers buy their electricity under fixed price contracts and are indifferent to spot prices whether they be high or low.

Contract prices need to be high enough to allow the generation sector to earn a return on its investment. If returns are not high enough, then plant closures will follow, with a resultant increase in contract prices. Also, negative prices are not being caused by falling costs in the generation sector. Instead, the negative prices are a feature of the way the spot market was designed to handle periods when more generators wanted to produce than there was physical demand for electricity.

Therefore, negative prices do not represent any “savings” that can be passed on to customers. Under these conditions we would expect contract prices to hold up, and that is what we are currently seeing.

In the shorter term, we observe that concerns over possible supply shortages in Victoria for the forthcoming summer are driving contract prices not only in Victoria, but also in South Australia and New South Wales. This is acting to keep contract prices up despite falling spot prices with these being most apparent in South Australia which, as the Energy Action Price Index shows, still has the highest contract rates in the National Electricity Market.