SEM Chart of the Week
Under pressure: Price cannibalisation in the SEM
After the publication of Project Ireland 2040 and Climate Action Plan 2019 it looks increasingly likely that renewables will be a significantly larger proportion of the generation mix. This is emphasised in Project Ireland 2040, with Ireland planning to increase its reliance upon renewables from 30% of the electricity generation mix to 70% by 2030. This will come about by the building of the order of 12GW of new renewables capacity across the time period. Currently, the grid has 4.5GW of renewable capacity.
This development has and will increasingly see renewable projects look to the wholesale power market to underpin investment. A complicating factor will therefore be price cannibalisation. This is the depressive influence on the wholesale electricity price at times of high output from intermittent, weather-driven generation such as solar, onshore and offshore wind. The absence of fuel costs makes these generators competitive in wholesale markets when they operate, with high volumes of production squeezing out capacity from less efficient and higher cost conventional plant.
This results in lower cost, more efficient thermal plant setting prices, and sometimes periods where no thermal plant is operating in the market at all. The effect is therefore low or sometimes negative wholesale power prices, correlated to high levels of output from one or more intermittent sources of renewable generation. The greater the fraction of output on the system to meet demand from intermittent generation at any given time, the greater this effect becomes.
With the one-year anniversary of I-SEM around the corner this week’s SEM Chart of the Week seeks to look back at the power market throughout 2019 to observe the potential impacts of price canniablisation in the SEM, along with identifying additional causes.
Pushing down on me
The day-ahead power price averaged €44.7/MWh throughout August, €16.8/MWh lower than last year’s average for the same month (€61.4/MWh).
Looking more broadly at the current average for the past eight months, a similar trend is evident – day-ahead power prices have fallen 9% against the same time period last year, averaging €52.0/MWh, down from €57.3/MWh in 2018. As figure 1 above shows, only January 2019 has averaged higher this year.
Pressure on prices
The price depression currently observed in the market has been partially attributed by the growth in wind capacity year-on-year. Observing figures from Thomson Reuters, all of Ireland wind capacity has risen from 4.5GW in August 2018, to 4.9GW in August 2019. This has coincided with higher wind output over the same time period (January – August 2019), up 25% on average against 2018 levels. As mentioned previously, higher wind output would have pushed more expensive forms of generation out of the mix and acted to lower prices in 2019.
This can be further expressed by observing the percentage share of generation that wind has commanded since 2018. This has undergone a slight increase averaging 37.4% of the mix currently in 2019, up from 33.9% in 2018.
More widely, as renewables capacity increases in the coming years so will the impact of price cannibalisation, and this will create implications for the PSO Levy – the customer levy that funds renewable support schemes. With the Renewable Electricity Support Scheme pegged against the day-ahead market, if power prices continue to lower, then this will cause a greater load on the PSO.
Prices on retreat
However, this development is somewhat muddied by the fact that generation from CCGT’s has also risen (up 3.2 percentage points to 41.3%) amid the fall of coal-fired utilisation driven by the downturn in gas prices this year.
It is this price depression experienced in the gas market – coming about by the influx of LNG into Europe across the first half of the year and above seasonal gas storage stocks across the continent -which will have also driven power prices downwards this year.
Overall, the downturn in the day-ahead power price in the SEM can be attributed both to wind driven price canniablisation and the bearishness of the wider gas market amid a sustained period of market oversupply.
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