Wind energy’s impact on electricity prices

Increasing use of energy from wind farms has lowered electricity prices, but increased price volatility in the national energy market, new research finds.

As Australia’s state governments set their sights on reaching net-zero carbon dioxide emissions by 2050, to combat global climate change, the focus is on renewable energy to lead the way.

However, there are ongoing concerns that greater use of renewable energy, particularly variable energy such as wind and solar, might reduce affordability and reliability.

As part of his PhD research at the University of Technology Sydney (UTS), Muthe Mwampashi examined data from the national energy market (NEM) between 2011 and 2020, to understand how wind power affected price levels and, for the first time, price volatility.

Australia is currently experiencing one of the world’s fastest transitions to renewable energy generation – up to 10 times higher than the global average. 

Together with Dr Christina Nikitopoulos and Dr Otto Konstandatos from UTS Business School, and economist Dr Alan Rai, director of investment advisory firm Baringa Partners, he examined four main markets for wind generation: New South Wales, South Australia, Victoria and Tasmania.

The study 'Wind generation and the dynamics of electricity prices in Australia' found that a 1 gigawatt per hour increase in wind generation decreased daily prices up to $1.30 per megawatt-hour and typically increased price volatility up to 2 per cent.

“While lower prices are good news, increased volatility in prices – including negative prices and rapid price spikes – are a concern because this creates greater uncertainty in the market, and poses a risk to investors, as well as impacting end-consumer electricity bills,” says Mr Mwampashi.

“Australia is currently experiencing one of the world’s fastest transitions to renewable energy generation – up to 10 times higher than the global average.

“This rapid transition brings considerable challenges, particularly because the national energy market is made up of an interconnected network of states with very different mixes of renewable energy generation – from mostly hydro, to solar and wind,” he says.

The study focused on the impact of wind energy because it is the dominant variable renewable energy. South Australia in particular has more than 50 per cent wind penetration – the highest in the national energy market, and second only to Denmark in the world.

It revealed that it is not only consumer demand and the ups and downs of electricity generation – whether the wind blows – that drive price levels and volatility. Gas prices, the amount of hydropower generation and interconnector flows between states also have a significant impact.

Higher gas prices in the export market drive increases in Australian electricity prices, and hydropower, while more reliable, can be affected by drought.

One solution to the intermittency of variable renewable energy is greater use of cross-border interconnectors because they allow pooling and sharing of available generation capacities.

“The research findings underscore the importance of investment in cross-border connectivity within the national energy market to reduce price volatility and ensure the reliable and effective delivery of renewable energy,” says Dr Nikitopoulos.

“Investment in complementary technologies, such as in storage, transmission and fast-start plant, which are able to respond rapidly to changes in renewable generation supply, will also ensure a smoother transition with minimal capacity disruption,” she says.

The study also looked at the effect of the implementation of the carbon pricing mechanism between 2012 and 2014, and the nationwide lockdown restrictions due to the COVID-19 pandemic. Both had a measurable impact on electricity price dynamics.

The decrease in wholesale electricity prices during the COVID-19 lockdown restrictions period primarily reflected the decline in demand, lower gas and coal prices, and increased renewable output.

“The findings highlight both the existing benefits of renewables, as well as investments that policymakers, governments and private investors can make to seize the opportunities and minimise the threats from additional renewables,” says Dr Rai.