Wind Generation and the Dynamics of Electricity Prices in Australia

Abstract

Australia's National Electricity Market (NEM) is experiencing one of the world's fastest and marked transitions toward variable renewable energy generation. This transformation poses challenges to system security and reliability and has triggered increased variability and uncertainty in electricity prices. By employing an exponential generalized autoregressive conditional heteroskedasticity (eGARCH) model, we gauge the effects of wind power generation on the dynamics of electricity prices in the NEM. We find that a 1 GWh increase in wind generation decreases daily prices up to 1.3 AUD/MWh and typically increases price volatility up to 2%. Beyond consumption and gas prices, hydro generation also contributes to an increase in electricity prices and their volatility. The cross-border interconnectors play a significant role in determining price levels and volatility dynamics. This underscores the important role of strategic provisions and investment in the connectivity within the NEM to ensure the reliable and effective delivery of renewable energy generation. Regulatory interventions, such as the carbon pricing mechanism and nationwide lockdown restrictions due to COVID-19 pandemic, also had a measurable impact on electricity price dynamics.

Role of Variable Renewable Energy Penetration on Electricity Price and its Volatility Across Independent System Operators in the United States

“…In general, increasing penetration of VRE is associated with a lower average wholesale price of electricity. This behaviour has been found in both domestic (4)(5)(6)(8)(9)(10)(11)(12)(12)(13)(14)(15)(16)(17)(18)(19)26) and some international (22)(23)(24)(25)27,28) electricity markets. A summary of the domestic studies can be found in Supplementary Materials (Table S1).…”

“…There are also instances where solar energy penetration have abated temporal price volatility (33,35). The evidence from literature suggests that the relationship between temporal price volatility and VRE penetration can vary widely as a result of a confluence of several factors, including patterns of demand (34), weather (22), and the availability of flexible generation (33). In 5 of the 6 ISOs we studied, the system temporal price volatility decreased as the penetration of VRE increased across all quantiles.…”

“…While the literature on the average behaviour of electricity price and VRE penetration has been consistent, its price volatility effects with respect to time (temporal price volatility) has been a topic of controversy. Some studies find evidence of an increase in temporal price volatility as VRE penetration increases (4,22,26,30), while others are unable to show significant evidence that increasing the share of VRE leads to high temporal price volatility (31,32). A case study of Germany and Denmark found that increasing penetration of VRE could either increase or decrease the temporal price volatility (33).…”

“…A case study of Germany and Denmark found that increasing penetration of VRE could either increase or decrease the temporal price volatility (33). While studies have often found that high wind energy penetration contributes to high temporal price volatility (4,6,22), a study in South Korea showed that temporal price volatility decreases as wind penetration increases up to 10% since the wind profile matches the demand patterns at this penetration (34). There are also instances where solar energy penetration have abated temporal price volatility (33,35).…”

“…The chosen methodology for exploring the relationship between VRE and system electricity price and price volatility in several ISOs in the United States has applicability in the broader international context. We note that some international studies have explored this relationship in Italy (24), Germany (22,24), South Australia (25), Spain (24,28), Denmark (22,27), and South Korea (34). Our approach captures non-linearity and distributional effects and can be applied to other electricity markets.…”