TODAY’S STUDY: How Distributed Solar Is Cutting Aussie’s Power Costs
Impact of small solar PV on the NSW wholesale electricity market
12 October 2017 (Energy Synapse)
Energy Synapse has been engaged by Solar Citizens Australia to perform an independent analytical study to investigate the impact of small solar PV systems on the NSW wholesale electricity market. As per the Service Agreement dated 20 June 2017, this impact has been estimated by constructing a counterfactual case where NSW has zero small solar installed and hence the electricity that would have been produced by small solar is instead serviced by existing centralised generators. This study considered a 12 month period from 1 May 2016 to 30 April 2017. Small solar PV systems in NSW are estimated to have generated 1,540 GWh of electricity during this period.
Despite contributing only 2% to electricity generation, this study found that small solar PV systems put significant downward pressure on wholesale electricity prices in the NSW market. If there was no small solar installed in NSW, we estimate that the volume weighted average price of wholesale electricity would have been $29-44/MWh (33-50%) higher than the actual price of $88/MWh. This equates to a $2.2-3.3 billion cost saving to the NSW market (see Figure 1). Thus, each megawatt hour of power that was produced by small solar lowered wholesale costs by $1,400-2,200. This benefit is shared by all consumers, regardless of whether or not they have installed solar PV systems.
In addition to electricity pricing, small solar PV was also found to significantly reduce both the severity and length of peak demand. Severity is defined as the maximum five minute electricity demand on a given day. The length of peak demand is the number of hours in a given day that are within 5% of the maximum five minute demand. An examination of the top 10 demand days during the study period found that small solar reduced the severity of peak demand by an average of 432 MW or 3%. Even more significantly, small solar was found to reduce the length of peak demand by 58%, from an average of 5.3 hours to 2.2 hours.
Small solar in NSW Small-scale solar photovoltaic (PV) systems are defined as solar panel systems with a capacity of no more than 100 kW. They are generally found on the rooftops of homes and businesses, and occasionally as small ground mount installations. This study focuses on small solar PV only and does not consider the impact of solar systems greater than 100 kW.
This study considered a 12 month period from May 2016 to April 2017. During this period, it is estimated that small solar in New South Wales (NSW) generated about 1,540 GWh of electricity. This was approximately 2% of the state’s power needs. During peak production periods, small solar generated close to 960 MW of instantaneous power. Figure 2 shows the total monthly electricity generated from small solar PV systems in NSW over the study period. Small solar systems less than 10 kW represent approximately 80% of the installed capacity, and the remaining 20% are systems with a capacity between 10 kW and 100 kW.
How the wholesale electricity market works
The National Electricity Market (NEM) is classified as a real-time energy only market. The NEM is operated to balance the instantaneous demand and supply for electricity, while ensuring safety, reliability, and cost efficiency.
The dispatch process is complicated but to put it in very simple terms: Generators submit offers to the Australian Energy Market Operator (AEMO) for each five minute dispatch period, signalling how much electricity they are willing to provide and at what price. AEMO’s central dispatch process then orders these offers from least to most expensive. The least cost generators are then dispatched to serve the demand in the market. The marginal bid (i.e. the last/highest cost generator that is selected) sets the price for everyone in that dispatch period.
The NEM is currently financially settled on a 30 minute basis. Thus, the five minute dispatch prices are averaged to produce the 30 minute Trading Price. All Generators who were dispatched receive this Trading Price from AEMO, and in turn, all retailers pay this price for the electricity that their customers have consumed.
A notable recent event in the NEM is the closure of Hazelwood, a brown coal-fired power station in Victoria, at the end of March 2017. The exit of Hazelwood from the market is reflected in the data used in this study from late March to end of April 2017.
Relationship between small solar and the wholesale market
Small solar PV systems are not registered as generators in the wholesale market. Instead, their generation is essentially treated as negative demand. Therefore, if there was no small solar installed, there would be extra demand that would need to be met by centralised generators.
Below is a simple illustrated example. In this fictional example, there are three offers to generate electricity for the community. Generator 1 offers to supply 50 MW for $20/MWh. Generator 2 offers to supply 30 MW for $50/MWh. Generator 3 offers to supply 20 MW for $100/MWh. These offers are illustrated in Figure 3.
In the first scenario, no one in the community has small solar installed and the demand for electricity is 90 MW. According to the bid stack in Figure 3, all three generators will need to be dispatched to meet the demand. The marginal bid is the bid from Generator 3 and therefore all three generators will receive $100/MWh for their electricity.
In the second scenario, the community still needs 90 MW but some people have installed small solar PV systems, which are currently generating 20 MW. Even though the community still needs 90 MW, from the perspective of the wholesale market, this looks like only 70 MW, as 20 MW is being met locally.
If the bid stack is the same as in Figure 3, Generator 3 will not be needed in this scenario, and hence only Generators 1 and 2 are dispatched. Generator 2 is now the marginal bid, meaning that Generators 1 and 2 will both be paid $50/MWh.
In this example, small solar can be said to have reduced the wholesale price from $100/MWh to $50/MWh. This is known as the merit order effect. The reduction in prices from small solar will of course vary depending on how much electricity small solar is producing at any point in time and what the bid stack looks like at that time. The dispatch process in the NEM is far more complicated but this is the basic principle that has been employed in this analysis…
Scope and Assumptions… Impact of small solar on wholesale electricity prices…Impact of small solar on peak demand…
Under the assumptions of this study, outlined in Section 2 Scope and Assumptions, the following conclusions were made:
• Despite contributing only 2% to generation, small solar PV systems put significant downward pressure on wholesale electricity prices in NSW via the merit order effect. Over the 12 month study period, the volume weighted average price could have been 33-50% higher without small solar. This means that NSW consumers could have paid $2.2-$3.3 billion more in the wholesale component of electricity bills.
• Small solar PV systems continue to put significant downward pressure on wholesale prices in the late afternoon, particularly around 4pm, despite the generation from these systems declining during this time.
• Small solar PV systems significantly reduce the severity of peak electricity demand in NSW. An average reduction of 432 MW (3%) was found across the top 10 demand days over the study period.
• Small solar PV systems significantly reduce the length of peak electricity demand in NSW. An average reduction of 3.1 hours (58%) was found across the top 10 demand days.