Different generator types earn different average prices in electricity markets. Australia’s National Electricity Market can see prices at anywhere between $14,200 per MWh to -$1,000 per MWh in response to different demand and supply situations. The price variability provides incentives for suppliers to stand ready to take advantage of high price situations, thereby also evening out the actual price.
The average price is now $80 per MWh, double the level that prevailed prior to the regulatory measures that favour wind forced major coal stations to close.
Hydro provides the ideal supply source to supply the peaks since water supply limits its availability to run but it can switch on and off quickly. This makes it an ideal balance to other fuels both for peak operations and to take advantage of sudden price surges caused by unanticipated demand increases or plant breakdown. The Snowy system runs, and was always intended to run, when demand and hence the price is high. It produces on average about 4500 GWh of electricity a year, 13 per cent of its theoretical capacity of 4100 MW.
Wind and solar are the opposite of hydro and can only run when the weather conditions are appropriate. Being non-dispatchable and dependent upon the weather, unlike coal, hydro and gas, they cannot take advantage of high prices to be ramped up to take advantage of high price periods in the wholesale electricity market.
Wind turbines produce no energy in the absence of wind or when the wind is blowing hard. Wind typically operates at around 30 per cent of its nominal capacity. Solar, either in large scale systems or on the rooftops that now supply 3-4 per cent of demand, only operates during the day and only at its maximum when the skies are clear.
Wind gets massive subsidies but gets below average prices on the spot market because the periods of high demand and high prices are often hot windless days.
This is observable from the data collected by the Australian Energy Market Operator, data that is almost impenetrable and requires software not normally available to undertake anything but rudimentary analyses.
The following table prepared by the Australian Energy Council illustrates the price discount earned by wind. Last year wind generators in South Australia earned 17 per cent less than the average price; wind generators in Victoria earned 10 per cent less.
The discount has tended to increase as the renewable share has increased and has tended to be higher in South Australia where wind has a greater share than in Victoria.
This suggests that there other factors in addition to the inability of wind to supply on hot windless days. It is likely that the growing share of wind is itself creating more high priced events by reducing the amount of baseload available to cover predictable demand changes. Hence the interest in batteries and $10 billion plus Snowy2 to help paper over the deficiencies of electricity dependent upon the elements.
The disparity between wind and other sources is also likely to be further enhanced by the price bidding of dispatchable generators. Responding to weather events that reduce the ability of wind farms to generate, other suppliers are likely to adjust their bidding upwards. Such behaviour is fully consistent with the way the market is designed to operate – the higher bids would attract more electricity from sources (i.e. coal and maybe gas) that are able to take advantage of such situations. The problem is, of course, that governments have made such sources highly risky by subsidising their competitors wind, batteries and Snowy2.
So while a surfeit of subsidised wind drives down prices, the distress this causes brings about closures of reliable generators, forcing up prices. But the inability of wind and solar to operate when the market requires them to do so is also lifting prices by incentivising other power sources to adjust their bid prices upwards in situations when they anticipate wind will not be available.