What’s the real price of wind energy?

To the uninitiated reading the dailies in July 2016, it may have seemed like the sky was falling as energy prices in South Australia rose.

When the wind stopped blowing throughout South Australia, its turbines also stopped turning. More than one-quarter of the total power capacity in this state simply switched off.

As electricity supplies fell, prices went up exponentially. One of the most viable and commercially available new energy technologies, wind energy, was cast as the villain.

But energy prices are a lot more complicated than your average fairytale. It’s not always so easy to identify the heroes and foes. And here’s why.

Forces for good and evil are replaced by market forces in this story.

This energy wholesale electricity market is super sensitive to supply and demand. With the substantial drop in supply from wind energy that happened in SA in July, power prices on the spot market went up. This in itself is not highly unusual.

Every day, every hour, every minute, in Australia’s wholesale electricity market, prices are going up and down depending on the electricity available and how people are using it.

Power isn’t stored. So, for the most part, it must be made just in time for when we need it. The balance of supply and demand that is happening up to the minute leads to price volatility. This happens over the course of every day based on when we all switch things on and off. An example of what this looks like is below.

PR Blog - Communicating energy prices - spot market

Check it out live on the Australian Energy Market Operator (AEMO) National Energy Market (NEM) dashboard.

Essentially what we see here is that power costs more on the wholesale market at times of peak usage. It can go from an average of $30-$40 per megawatt hour to up to about $13,000 per megawatt hour at most (in extreme, very rare cases). Special peaking-plants are switched on when we know demand will be supremely high (for instance on blistering hot summer days, when everyone’s air-conditioning is blasting).

Conversely, when demand dips, it can be hard to reduce the electricity being pumped out from regular coal-fired or base-load power stations, that can’t be easily or quickly switched off. All the power being spat out still needs to go somewhere, and so the spot price drops as low as zero or even into negative figures.

In line with all this, in July this year, when the wind turbines – that generally contribute upwards of 25% of South Australia’s power – stopped, there was a shortfall in supply relative to demand. And power prices went temporarily up, peaking at about $1,400/MWh.

There are several reasons, aside from the weather, that the power shortfall occurred in SA. That this happened and what it means for prices is essentially more to do with markets than technologies.

1. Gas prices have gone up.

Gas can be used as a source of electricity too. It can be fired-up quickly and until recently was relatively cheap – a little more than coal, but still less than most other forms of power.

But a few years ago, our natural gas was made available to international markets. This made the price effectively double: created by new demand for a finite resource, with only decades of known supplies available.

This makes it less attractive to use to create electricity – its power is only sold when the expense to produce it can be met. This used to sell at about $40 per megawatt hour. Now its about $100 per megawatt hour. This contributed to the shortage in supply in South Australia, driving up the spot price once the wind died down.

2. Its connection to the national market was poor.

While, for most of this conversation, we’ve been talking about South Australia as though it were a market of its own, it’s not. It is one of five states connected in the NEM or National Electricity Market – along with Queensland, New South Wales, Victoria and Tasmania.

So when the wind stopped blowing, why didn’t South Australia just draw some juice from the other states?

Normally it would. But in this case it couldn’t get enough extra power because the pipe from which to draw it was restricted. There is only one main interconnector between South Australia and the NEM via Victoria. It just so happened that work was underway to increase its capacity – or widen the road, so to speak – to enable it to transfer more power between these states. While “under construction”, just as with roadworks, the flow of power was restricted. Temporarily. The timing unfortunately, but clearly, demonstrated the need.

3. Old coal-generators are dying out.

Old coal-fired power plants no longer necessarily make money. Some are just no longer worth the investment to keep them going. And that’s without even introducing a carbon tax. But maybe a little to do with how a renewable energy target reduces the costs of buying green power. A coal-fired plant closed in South Australia last year because it was no longer viable, and the government wouldn’t prop it up. It probably would have been nicer if this had waited until the interconnector was upgraded. But it’s no fault of the weather or the wind turbines.

4. Unknown unknowns cloud debate.

Most of us would not have the faintest idea about electricity spot prices. In fact, most of us would prefer not to know anything about interconnectors, or base-power, or the draw backs of intermittent energy, or the difficulty faced in keeping our power supply and demand in perfect balance, and simultaneously cheap, at any given moment.

Most of us just want to flick the switch and have the light go on. Some of us want to do that without feeling guilty about the pollution that creates. But that is about the extent of it.

Fortunately, our power companies (the retailers who send us our bills) manage the bulk of the messiness for us. They negotiate contracts based on average prices, that more than cover their wholesale costs. Big purchasers of power (think: car manufacturers or aluminum smelters) negotiate similarly for themselves, effectively buying in bulk and so guaranteeing they get their power at certain price.

If bulk contracts are in place (either organised by your power company or by a broker if you’re a big user), then its very unlikely you will ever be forced to purchase power from the spot market. Unless of course your company has not bought enough. Presumably, some people take this risk given that on some days, when the price plummets, they may also benefit. Or because buying power they can’t sell or use is a waste. Given the risk they manage, a predictably higher spot price will also impact the averages upon which long term contracts are based.

But all of this, for most of us, is unknown. It has little or no bearing on our consumer choices or day to day lives.

Unfortunately not knowing about this makes it hard to untangle the arguments on either side of the technological debate about our evolving energy choices.

So what’s the real story?

There was a lot more at play in South Australia than just the entry of a new energy technology to cause last month’s power shortfall and the subsequent short-term price rises widely reported. It was a constellation of factors, some of them temporary, or the result of unfortunate coincidence. Many of them related to the functioning of a complex market that most of us have very little reason to know very much about.

Without that knowledge, clearly explained, it can be hard to distinguish fact from fairytale. Hero from villain.

To break down complexity for your audiences, talk to us.

Image credit: Wattle Point wind farm, South Australia, by penagate.