This is one of the best explainers of how marginal pricing in the electricity market works and how wind (and other zero fuel cost) renewables influence these prices. Thanks for writing it.
“the industry calls the "spark spread"). This is a short term risk: gas-fired plants have the technical ability to choose to not produce (subject to relatively minor technical constraints) at any given time, they can thus avoid any cash flow losses, and the very fact that they shut down will influence both the gas price (by lowering demand) and the electricity price (by reducing supply)”
this is largely true anywhere in the world but this year’s international gas price spike saw some odd behaviours at least in the Australian National Energy Market. while technically facilities can refuse to bid if it suits them, they are under contractual obligation to generate when they grid needs them, which is not often for GTs but they are generation of last resort (and hence price setters during those high demand/low RE events). the Australian NEM grid operator was forced to remind GT and coal operators of their obligations to generate because the high coal and gas prices were being used as justification for withholding supply when demand was very high. Even as the price cap of 14,500 $/MWh was reached GTs refused to bid. (strange because you’d think they had fixed price gas contracts or hedging protecting them from international price swings, but the owners of the GTs can i sell their gas to LNG export hubs in QLD for more money than burning it in their GTs, hence théir refusal to support the grid in its hour of need, their entire raison d’etre!)
The AEMO resorted to using their emergency rights under the market legislation forcing the generators to provide power at even higher cost than the market cap (which has now been lifted to $16.000/MWh). it’s not unlikely that the owners of the GTs were aware they were pushing AEMO to use their reserve powers as it provided even more profits around the clock for them. it’s called market power for a reason.
Thanks for the insight. If such episodes last longer the expected, that can alter the average yearly power price so it should be taken into account. Ultimately that would suggest that capacity mechanisms (where plants are paid a fixed sum yearly but must produce on demand at a price not linked to the short term price of gas)) should work better.
Well WA already has a capacity market, but it's also kind of a coal keeper, thought not enough to keep them until their end of design life. A difference between aero-derivative Open Cycle Gas Turbines and reciprocating engines that can burn fossil gas with coal plants is that GTs/CEs are relatively low CAPEX per MW and reality high OPEX (not so in USA during the flood of fossil gas rom the unconventional oil industry).
So GTs make heaps of money as it is. And serious windfall profits since Russia invaded Ukraine if they hedged their supply contracts (only idiots wouldn't!). An alternative is to just nationalise the backup generation for reliability. National governments can sit on assets/facilities without need strong returns, on national security grounds, especially nations who issue a sovereign currency, for them money isn't the issue, they create it, seemingly from thin air, themselves. The issues for sovereign currency issuing central governments is are the resources available to the extent they can purchase them without impacting price. I'm sure in the case of GTs and Reciprocating Engines it isn't going to be an under-supply issue!
couldn’t find you on twitter, so please link to you handle there. :-) typo in this sentence. “I have lost the link to the original article, but like to use it because it shows that in 2004, the IEA and the Economist were already acknowledging that wind power cost about the sale as gas, coal or nuclear electricity”
Excellent post, quite some insights in there. Shared with others in my circle. Thanks!
Really enjoyed reading this update to your OilDrum classic! I've always found I learn so much from your posts, please do keep writing!
Thanks Phil, always good to get the feedback!
Great article. Thanks for writing it.
Concerning CfD, I wrote an article a few months ago : https://gemenergyanalytics.substack.com/p/thoughts-on-the-contract-for-differences
And another one on cannibalization: https://gemenergyanalytics.substack.com/p/solar-cannibalization-more-details
Thanks - I did see these, useful!
This is one of the best explainers of how marginal pricing in the electricity market works and how wind (and other zero fuel cost) renewables influence these prices. Thanks for writing it.
Thanks, much appreciated :)
“the industry calls the "spark spread"). This is a short term risk: gas-fired plants have the technical ability to choose to not produce (subject to relatively minor technical constraints) at any given time, they can thus avoid any cash flow losses, and the very fact that they shut down will influence both the gas price (by lowering demand) and the electricity price (by reducing supply)”
this is largely true anywhere in the world but this year’s international gas price spike saw some odd behaviours at least in the Australian National Energy Market. while technically facilities can refuse to bid if it suits them, they are under contractual obligation to generate when they grid needs them, which is not often for GTs but they are generation of last resort (and hence price setters during those high demand/low RE events). the Australian NEM grid operator was forced to remind GT and coal operators of their obligations to generate because the high coal and gas prices were being used as justification for withholding supply when demand was very high. Even as the price cap of 14,500 $/MWh was reached GTs refused to bid. (strange because you’d think they had fixed price gas contracts or hedging protecting them from international price swings, but the owners of the GTs can i sell their gas to LNG export hubs in QLD for more money than burning it in their GTs, hence théir refusal to support the grid in its hour of need, their entire raison d’etre!)
The AEMO resorted to using their emergency rights under the market legislation forcing the generators to provide power at even higher cost than the market cap (which has now been lifted to $16.000/MWh). it’s not unlikely that the owners of the GTs were aware they were pushing AEMO to use their reserve powers as it provided even more profits around the clock for them. it’s called market power for a reason.
Thanks for the insight. If such episodes last longer the expected, that can alter the average yearly power price so it should be taken into account. Ultimately that would suggest that capacity mechanisms (where plants are paid a fixed sum yearly but must produce on demand at a price not linked to the short term price of gas)) should work better.
Well WA already has a capacity market, but it's also kind of a coal keeper, thought not enough to keep them until their end of design life. A difference between aero-derivative Open Cycle Gas Turbines and reciprocating engines that can burn fossil gas with coal plants is that GTs/CEs are relatively low CAPEX per MW and reality high OPEX (not so in USA during the flood of fossil gas rom the unconventional oil industry).
So GTs make heaps of money as it is. And serious windfall profits since Russia invaded Ukraine if they hedged their supply contracts (only idiots wouldn't!). An alternative is to just nationalise the backup generation for reliability. National governments can sit on assets/facilities without need strong returns, on national security grounds, especially nations who issue a sovereign currency, for them money isn't the issue, they create it, seemingly from thin air, themselves. The issues for sovereign currency issuing central governments is are the resources available to the extent they can purchase them without impacting price. I'm sure in the case of GTs and Reciprocating Engines it isn't going to be an under-supply issue!
Thanks
Great analysis, very useful.
a solid article, Jerome.
couldn’t find you on twitter, so please link to you handle there. :-) typo in this sentence. “I have lost the link to the original article, but like to use it because it shows that in 2004, the IEA and the Economist were already acknowledging that wind power cost about the sale as gas, coal or nuclear electricity”
sale → same