Analysis of price volatility in the QLD region over summer 2007-08

Our Managing Director was asked to speak at the “Queensland Energy” conference in Brisbane on Wednesday 12th March – specifically addressing the topic of price volatility in the NEM.

To provide the basis of discussion during the conference, we focused our analysis solely on Queensland region (to make the topic more manageable).
In our review of volatility in the Queensland region, we focused specifically on 3 core attributes of the market: Queensland dispatch prices; NEM-Wide Instantaneous Reserve Plant Margin; and the concept of “Economic Islands”.

Drought of 2007

Here’s some articles about the impact of the drought on the NEM – culminating in a stepped change in prices, and changes to dispatch patterns, etc…

Background information to the shortage of capacity in winter 2007

Following from the interest generated in the article published in the AFR, we completed some analysis of the trend in IRPM over the history of the NEM up until June 2007.

The results of this analysis revealed that at no time before 2007 had the IRPM even dropped below 12% and that, except for the 2-day period (19th and 20th June) the IRPM had not dropped below 10%.

11th January 2007 – first spike in demand above 30,000MW

There was a temperature-driven spike in demand across the NEM later in the week beginning Sunday 7th January – culminating in the summer’s first demand peak above 30,000MW (on Thursday 11th January).

On this occasion, the spot price spiked above $1000/MWh in Queensland, NSW, Snowy and Victoria,

7th December 2005 – high demand in Queensland and NSW

For several days in early December, temperatures reaching 40 degrees in Queensland and New South Wales cause airconditioning load (and hence total demand) to soar in both regions.

The high demands resulted in very high prices being experienced in both QLD and NSW (and also the SNOWY region). Both VIC and SA were insulated from the high prices because (at least in part) of the fact that transfers over the SNOVIC interconnector were constrained to minimise negative inter-regional surplus

Winter 2002 – Generator Market Power

From the start of the NEM through until 2001, the NEM was typified by a pricing dichotomy with sustained rock-bottom pricing in NSW, Snowy and Victoria and high and volatile pricing in the extremities (Queensland and South Australia).

In 2001, the QNI interconnection and many generation projects were developed. This led to the convergence of prices between all regions, and the disappearance of price volatility – circumstances that were a real threat to generator profitability.

In response, generators adopted an approach that came to be known as “the economic withholding of capacity” to engineer volatility into the market throughout winter 2002 – and hence higher prices as a result., and generator behaviour.

26th January 2006 – high demand and price in Victoria and SA

There was a high level in demand in Victoria on Thursday 26th January 2006.

This was especially remarkable, considering that it was an Australia Day public holiday – when commercial (though not industrial or residential) demand could be expected to be somewhat lower than would otherwise be the case.

Coupled with this level of demand was a significant spike in price that lasted several hours.

23rd January 2006 – new record for peak NEM-Wide demand

Based on forecasts NEMMCO had been providing through their PASA process, we expected that it might prove that this week would deliver huge demand levels, and high prices.

Not to disappoint, the market did deliver high levels of demand in all regions:
(a) Peak demand levels were reduced somewhat from the huge levels the previous week in Victoria and South Australia;
(b) Demand levels were also still building to the record level to be experienced the following week in NSW;
(c) Peak demand levels in Queensland were fairly steady (and high) for most weeks of summer.
(d) In combination, a new NEM-wide peak demand target of 30,994MW was set on Monday 23rd January.