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July 2016

Electricity prices have been very high and volatile during the months of June and July in parts of Australia, and specifically in South Australia (SA). One of the reasons, of course, is that the electricity demand has been high and fluctuating due to some serious cold-snaps in SA over that time.

Some of the media were hasty in blaming the electricity price spikes on the large share of renewables, especially wind farms, in the SA energy generation mix.

This was met with rebukes from other media outlets, which pointed to many of the other reasons why electricity prices have spiked in SA over the period.

So, what to make of all this? Firstly, it is worth noting that the observed price spikes in SA are not unique or unprecedented in the Australian context. We usually get similarly high price spikes in the summer months in Queensland .
Secondly, a thing to bear in mind is that the extremely high price spikes last for short periods of time, say an hour or two.

The reasons for electricity price spikes are multiple. The local electricity generation mix is only one of the contributing factors. Other factors that are as, or probably more important are: availability of supply from other regions, the length and severity of the particular hot or cold weather snap, as well as speculation on the National Electricity Market (NEM), which is rife at times of great electricity price volatility.

Another point to note, which has not been mentioned in the media, is that the spot prices observed at NEM are only counting for a relatively small proportion of the electricity actually traded among market participants. This is because most participants in the electricity market take part in an incredibly active market for derivative contracts for electricity (e.g. electricity futures, options and swaps), which they use to hedge their positions. So in reality, the enormous price spikes have relatively little actual bearing on the players in the market.

At any rate, the argument that renewables are exclusively to blame for the situation in SA does not really hold. This was acknowledged by the new federal energy minister. The intermittency of supply that plagues renewable energy sources is well known, but that doesn’t mean that renewables do not have a place in the electricity generation mix.

The fundamental problem is the interconnectedness of electricity networks. Given that Australia is an isolated / island continent, and that electricity networks in Australia itself are not entirely interconnected, we have difficulties to meet a surging local demand at critical times. High prices on the NEM reflect those difficulties. Building a better connected energy networks within Australia, and ideally, linking with the Asian electricity markets in the future would reduce the chances of price spikes.

In fact, a wider (and possibly in the future, a global) electricity network connectedness combined with improvements in transmission efficiency would be best possible ways to overcome the intermittency of renewable energy supply. The sun is always shining somewhere on this planet, and the wind is always blowing somewhere!

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