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.
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!
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
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.
Great analysis, very useful.