Trouble in the Cabbage Patch

Over the past decade, the surge in renewable energy has steadily driven down wholesale electricity prices across Australia. However, this trend has played out unevenly, with each state following its own trajectory, shaped by unique renewable resources, government policies, and market challenges.

In this article, we’ll examine the current state of the energy transition through the lens of pricing, identifying which states are the most and least favourable for renewable energy projects (most favourable for energy users) in 2024. We’ll also take a closer look at challenges facing Victoria—a state that has fallen from being a leader in merchant renewable profitability, to the bottom of the pack, in just a few years.

NEM Pricing Snapshot

We’ve compiled dispatch-weighted average prices (DWAP) for the past seven years in the charts below. DWAP represents the average revenue generators earn per megawatt-hour (MWh) of energy they supply to the grid. To avoid overwhelming you with too many charts, we’ve focused on the four major states within the National Electricity Market (NEM).

Winners and Losers

New South Wales is emerging as the clear leader, offering the highest average prices for wind and solar generation. With the largest energy demand and relatively low renewable penetration, it remains the most profitable state for renewable projects, with Queensland close behind for wind.

However, what's particularly interesting is that Victoria (highlighted in black on the chart), which topped the price charts alongside NSW from 2018 to 2020, has now dropped to the bottom. Victoria (alongside SA) has consistently been the worst-performing state for renewables over the past four years. Before we dive deeper into the reasons behind Victoria's price decline, let’s first dissect the pricing dynamics a bit more.

Pricing Dynamics

To provide some high-level background, all generators bid a price to dispatch during each trading interval in a day. The NEM operates by dispatching the cheapest bids first. Since renewables typically have near zero short-run marginal cost they bid a very low price to ensure they are always dispatched. For example, it’s common for renewables to bid a negative LGC price (~ minus $40MWh). The price of the last generator needed to meet demand sets the spot price. As demonstrated in the bands below, if demand can be met entirely by renewables, the spot price will be negative. Conversely, if gas (which has a high short-run marginal cost being the cost of gas) is required to fill in demand, the spot price will be very high (north of $180/MWh in Q2 this year). Coal generators (e.g. brown coal plants), which have slow ramp-up/down requirements would typically also bid low (less than their short-run marginal cost) during high renewable generation periods to ensure they are dispatched such that they’re available for the evening/morning peaks.

With this in mind, let’s take a look at the intraday charts below. These show what a typical day in the NEM looked like during FY24. The x-axis represents the 24 hours of the day, while the “mountain ranges” illustrate the net load at each hour and the fuel source of generation used to meet that load. The red line overlay shows the average electricity price for each hour.

Lower prices tend to occur around midday when solar resources are at their peak, while higher prices correlate with peak demand in the evenings, typically met by fossil fuel generation.

Zero or negative prices during midday are a defining feature of a renewable grid without sufficient battery storage to absorb excess supply. Over FY24 Queensland peaks have been significantly higher due to reduced coal generator capacity caused by both scheduled and unscheduled outages. In Victoria, the intraday spread is much closer, as brown coal generation is cheaper and Victoria can import surplus power from SA, NSW and Tasmania (reducing the need to run its gas peakers).

Victoria: The more advanced energy transition state

So, what caused the rapid fall in prices in Victoria? The primary catalyst for the price shift has been the rapid growth of wind capacity. The share of electricity generated by wind has risen from 7% in 2017 to over 20% in 2024. The high prices seen in 2017 were due to the closure of Hazelwood, which forced gas generators to fill the gap. However, as more wind capacity has come online, the reliance on gas has diminished. With more price intervals set by wind and brown coal, prices have shifted from the upper gas band of $150+ to the sub $20 range for wind and brown coal. Effectively, brown coal has replaced gas as the marginal price setter, explaining the rapid decline in spot prices.

Another key factor driving the price disparity is the interconnector constraint between Victoria and New South Wales. Typically, interstate price disparities would be corrected by the lower-priced state exporting excess energy to the higher-priced state. However, the transmission network near the VNI (Victoria-New South Wales Interconnector) is becoming increasingly congested as more renewable projects are built in that area. As shown in the chart below, VNI flow has been increasingly constrained around midday, limiting the northward flow of energy from Victoria to New South Wales. This has widened the price gap between the states over the past few years.

The growth of renewables, the continuance of incumbent brown coal generators in combination with interconnector constraints, is making Victoria a challenging landscape for new renewable projects. Unless there’s a major coal plant outage (or bring forward of scheduled closure dates) or a significant drop in wind generation, Victoria is likely to remain in this challenging situation for the foreseeable future, at least until the eventual closure of Loy Yang. The completion of VNI West (a new 500kV interconnector via Kerang) will ease the constraint and allow export to NSW, but we do not believe it will fundamentally shift pricing dynamics.

Key Takeaways

It would be wrong to look at challenges in Victoria in isolation or see them as temporary, while New South Wales and Queensland are currently the most favourable states for renewables, as more wind and solar capacity comes online in these states, high prices will also be competed away, and the intraday price trough will deepen in northern states. At some point, all coal-fired plants will be shut down and replaced by renewables with battery firming (and gas in the interim). Victoria is simply in a later phase of the energy transition. However, with the increase in battery storage, we expect to see some stabilisation in the intraday price spreads between different fuel types. It’s a space worth watching closely.