NEMLink: augmenting the Australian National Electricity Market transmission grid to facilitate increased wind turbine generation and its effect on wholesale spot prices

31 December 2015

This report compares the effect of increasing the number of wind turbine generators on wholesale spot prices in the Australian National Electricity Market’s (NEM) under the existing transmission grid and an augmented version of the transmission grid called NEMLink (AEMO 2010a, 2010b, 2011a, 2011b).  The comparison is made from 2014 to 2025.

We use a sensitivity analysis to compare the effect of five different levels of wind penetration on wholesale spot prices in the original NEM grid and NEMLink augmented grid.  The five levels of wind penetration span Scenarios A to E where Scenario A represents ‘no wind’ and Scenario E includes all the existing and planned wind power sufficient to meet Australia’s original 2020 41TWh Large Renewable Energy Target (LRET).  We also use sensitivity analysis to evaluate the effect on wholesale spot prices of growth in electricity demand over the projections years 2014 to 2025 and weather over the years 2010 to 2012.  The sensitivity analysis uses simulations from the ‘Australian National Electricity Market (ANEM) model version 1.10’ (Wild et al. 2015).

We find that NEMLink reduces the NEM’s average wholesale spot price by 28% in Scenario A that is without any wind power.   In comparison, without NEMLink but with the highest wind penetration Scenario E that is wind power alone reduces the NEM’s wholesale spot prices by 51%.  The combination of both introducing NEMLink and increasing the wind power penetration from Scenario A to E reduces the NEM’s wholesale spot price by 65%.

These dramatic price reductions are beneficial for electricity consumers and will help fossil fuel generators exit the market but the long term viability of renewable energy generators needs considering with such low wholesale spot prices.  Indeed, the feasibility of an energy only market consisting of an increasing proportion of renewable energy whose marginal costs are nearly zero becomes problematic for financing the ongoing renewal of the renewable energy fleet and the displacement of the fossil fuel fleet.

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William Paul Bell, Phillip Wild, John Foster, Michael Hewson, 2015, NEMLink: augmenting the Australian National Electricity Market transmission grid to facilitate increased wind turbine generation and its effect on wholesale spot prices, Energy Economics and Management Group (UQ), viewed 26 March 2017, <http://apo.org.au/node/61333>.

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