Q1 2020 Quarterly Energy Dynamics highlights:
- East coast wholesale electricity and gas prices return to 2016 levels
- NEM power system separation events drive record system costs
- Limited observable COVID-19 impacts on NEM operational demand during the quarter
- A new record minimum demand in WA’s Wholesale Electricity Market (WEM)
The Australian Energy Market Operator (AEMO) has released its Q1 2020 Quarterly Energy Dynamics report. The report highlights the continued fall in east coast wholesale energy prices, significant system and market impacts from severe weather and summer bushfires and record minimum demand in the WEM among key outcomes for the quarter.
AEMO Managing Director and Chief Executive Officer Audrey Zibelman said the quarter kicked off with severe heat and bushfires and ended with emerging impacts from the Coronavirus pandemic.
“With prolonged bushfires and major power system separation events, changing markets and a reduction in operational demand, and the lowest east coast wholesale energy prices since 2016 – it’s been an extraordinary start to the year,” said Ms Zibelman.
East coast wholesale gas market prices fell by an average of 42% compared to Q1 2019, from $9.75 per gigajoule (GJ) to $5.63/GJ, marking the lowest gas market prices in four years.
Despite several days of extreme price volatility in January, NEM-average spot electricity prices fell to the lowest levels since Q4 2016 at $66 per megawatt hour (MWh), down 49% from $130/MWh in Q1 2019. This was driven by lower gas prices, reduced operational demand, increased wind and solar output and a shift to lower priced offers from black coal and hydro generation.
“Sunny conditions and mild temperatures broke first quarter minimum demand records in both Victoria and South Australia, while a new minimum demand record was set for the second consecutive quarter in Western Australia,” said Ms Zibelman.
On 1 January 2020, new Q1 minimum demand records were set for Victoria (3,300 MW) and South Australia (520 MW) due to the combination of mild weather and sunny conditions driving up rooftop solar production, and low demand typically associated with the New Year’s Day public holiday.
In Western Australia, a record minimum demand was set for the second consecutive quarter, with demand reaching 1,135 MW on Saturday, 4 January 2020, which was 24 MW lower than the previous record set in Q4 2019. Rooftop PV generation accounted for 44% of the total underlying demand at the time. The WEM also recorded its third highest daily peak demand on record, with operational demand reaching 3,916 MW at 17:30 hrs on 4 February 2020, driven by high temperatures in Perth.
“Although electricity and gas prices were generally lower this quarter, major power system separation events following bushfire and storm activity created volatility in both energy and frequency control markets,” said Ms Zibelman.
Total NEM system costs (in this report, NEM system costs refer to the costs associated with: FCAS, directions compensation, RERT and VRE curtailment) increased to $310 million, which is 8% of the energy costs for the quarter, much higher than its typical value of 1-2%. This was driven by three major power system separation events during the quarter (the other two major separations were the separation of the New South Wales and Victoria power systems on 4 January 2020 due to bushfire activity, and the separation of the South Australian and Victorian power systems on 2 March 2020), including the 18-day separation of the Victorian and South Australian power systems following storm damage to transmission towers in Victoria. These events contributed to 74% of total NEM systems costs for the quarter with increased costs across all four categories:
- Frequency Control Ancillary Services (FCAS) made the highest contribution of system costs, increasing to a record quarterly level of $227 million.
- The cost of directing units to maintain system strength increased to $33 million, the highest quarter on record.
- Reliability and Emergency Reserve Trader (RERT) costs decreased compared to recent first quarters, with quarterly costs currently estimated at $34 million. AEMO publishes separate quarterly reports with details on RERT costs (quarterly RERT reports can be found here).
- Estimated VRE curtailment costs increased to record quarterly levels of $15 million (excludes economic curtailment due to negative spot prices and high FCAS cost. The cost of curtailed VRE output estimated to be $40/MWh of output curtailed).
Of these quarterly NEM system costs, approximately $166 million was recovered from generators, with the remainder ($144 million) recovered from retailers.
The report also identifies how COVID19 is impacting the sector. The most dominant impact is related to the rapid decline in global oil and gas prices which were accompanied by smaller declines in coal prices observed. These pricing declines commenced prior to the imposition of health and safety restrictions and accelerated as a result of the world wild pandemic response.
Up to now, Australia has not experienced the significant fall off on energy demand reported in other jurisdictions. Rather, recent mild weather in most parts of Australia have resulted in lower demand of 4 percent compared to previous years. AEMO analysis shows that when normalised for weather a fall in demand of up to 3-4% in New South Wales in late March represents the highest level of COVID related demand reductions. This compares to 20-30% reductions identified in parts of Europe and the US.
Electricity futures contracts traded on the Australian Stock Exchange for the Q2 and Q3 2020 quarters fell 11% in the last two weeks of March. Future prices represent market expectations of economic activity and reduced demand.
For more information and analysis including inter-regional transfers, power system management, pipeline flows, and WEM market dynamics, download the AEMO’s Quarterly Energy Dynamics Q1 2020 online.
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