South Australia’s spot price sat at the market price cap for a chunk of a hot Tuesday afternoon last month, then dropped below zero before most people had switched the oven on for dinner. Same grid, same day, same set of generators. A swing of roughly $18,000 a megawatt-hour inside twelve hours. Nobody at AEMO would call that unusual.
That’s the bit that trips up a lot of otherwise sensible commentary on the National Electricity Market. People see a chart with a spike and assume something has gone wrong. Mostly nothing has gone wrong. The market is doing exactly what it was built to do, which is find the price at which the next unit of supply meets the next unit of demand, every five minutes, all day, every day. It just so happens that price can be free one minute and eye-watering the next. Understanding why matters more now than it did a decade ago, because the grid is leaning harder on assets whose costs work nothing like a coal plant’s.
What the swings actually look like on the dispatch curve #
Start with the mechanics. AEMO dispatches the NEM in five-minute intervals, ranking every available generator from cheapest to most expensive and stacking them until supply meets demand. I’ve written before about how the NEM dispatches power every five minutes, and the short version is that the price in any interval is set by the last, most expensive generator needed to keep the lights on. On a mild, breezy Sunday that might be a wind farm bidding at zero. On a still, 41-degree Wednesday evening with three coal units offline for maintenance, it might be a gas peaker that only turns up a handful of days a year and prices accordingly.
Those two generators can be dispatched an hour apart. The price difference between them is not a market failure. It’s the whole design.
Rooftop solar has moved the goalposts at midday #
The newer driver of volatility, and the one that’s changed the shape of the daily price curve most in the last few years, is rooftop solar. Twenty-plus gigawatts of it now sit on Australian roofs, and on a sunny weekend it can push operational demand on the grid down to levels the market barely used to see. I’ve covered the mechanics of this in rooftop solar and the midday minimum demand problem, but the price consequence is straightforward: when everyone’s roof is generating at once, grid-scale plant is fighting for a shrinking slice of demand, and prices go negative because someone has to pay to keep spinning rather than switch off. I’ve dug through enough of AEMO’s quarterly data to say the negative-price count keeps climbing every summer, not falling, and I don’t think the public conversation has caught up with what that means for anyone still running a coal unit on inflexible minimum-load settings. AEMO’s own market data dashboards, publicly available at aemo.com.au, show the pattern building year on year.
Then the sun goes down, rooftop solar disappears in about ninety minutes flat, and everything grid-scale has to fill the gap at once. That’s the ramp that gets peaking gas and batteries paid the way they are. I looked at the mechanics of this handover in negative electricity prices at midday: what they mean for you, and the short of it is that the midday trough and the evening spike are two symptoms of the same underlying shift, not separate problems.
The price cap and floor are volatility by design, not accident #
The AEMC sets a market price cap, adjusted for inflation each financial year, that currently sits north of $17,000 a megawatt-hour, alongside a market floor price deep in negative territory. That band is enormous by any normal commodity standard. Nobody trades wheat or iron ore across a range that wide in a single day. The AEMC set it that wide deliberately, because the whole point of the cap is to let prices rise high enough, occasionally, to make investing in peaking capacity worthwhile, while the floor lets prices fall low enough to signal there’s genuinely too much supply on the system. Squeeze that band and you remove the incentive for anyone to build the assets that show up during the worst five per cent of hours. Widen it too far and retailers get burned on unhedged exposure. The AEMC publishes the settings each year on aemc.gov.au, and it’s worth a look if you want to see how deliberately the boundaries are drawn rather than assume they’re arbitrary.
Thin reserves turn ordinary heat into extraordinary prices #
Volatility gets worse, not better, as coal leaves the system faster than firm replacement comes online. When reserve margins are thin, a single unplanned outage on a hot afternoon, the kind of thing that happens routinely at ageing plant, can flip the price-setting generator from a mid-cost gas unit to the most expensive peaker on the panel. I’ve made the case before that Australia is closing coal faster than it can replace it, and the price data backs that argument up more than the reliability data does. Reliability, measured properly, has mostly held. Price volatility is where the stress actually shows up first, because price is the fast-moving signal and new firm capacity is the slow-moving response.
Batteries and gas peakers are paid to chase the spikes, not smooth them away #
This is where big batteries and gas peakers earn their keep, and also where a lot of the public debate gets the incentive backwards. A battery doesn’t make money by flattening the price curve for the good of the system. It makes money by charging cheap and discharging into the spike, which means its commercial interest is aligned with volatility existing, not with it disappearing. Same logic applies to gas peakers, which I’ve compared directly in gas peakers versus big batteries: who firms the grid?. The more violent the swing, the more valuable the asset that can respond to it in under a minute. Take the volatility away entirely and you take away half the reason anyone builds fast-response firming capacity in the first place.
That’s the argument I’d push back on when people say the Capacity Investment Scheme is there to smooth prices. It isn’t, not directly. It’s there to guarantee revenue for firm and flexible capacity so the swings stay survivable rather than catastrophic. I’ve set out the mechanics in how the Capacity Investment Scheme actually works, and the honest structural point is that the scheme is a hedge against volatility, not a cure for it. Anyone expecting the CIS to deliver flat, boring wholesale prices is going to be disappointed. The scheme was never designed for that job.
Gas still sets the ceiling more often than people admit #
Whatever the headline share of renewables in the NEM, gas remains the marginal, price-setting fuel in a disproportionate number of the highest-priced intervals each year. That’s the honest structural argument for why gas keeps coming up in every serious conversation about firming, a point I’ve made at length in what ‘firming’ means and why gas keeps coming up. Gas is expensive on the margin, but it’s flexible, and flexibility is exactly what the five-minute market pays for during the hours that matter most. Batteries are eating into that job at the shorter end. They haven’t replaced it yet, not across the full range of durations a bad week on the east coast can throw up.
Where this actually lands on your power bill #
None of this means your household bill swings by $18,000 a megawatt-hour on a Tuesday afternoon, and it’s a fair question why not. Retailers hedge, contracting years ahead through futures and long-term power purchase agreements precisely so that spot volatility doesn’t flow straight through to customers. The AER’s Default Market Offer, which I’ve covered in the Default Market Offer and your power bill, is set on a forward-looking, smoothed basis rather than a spot one. The volatility is real, but it mostly gets absorbed by retailers, generators and increasingly by battery operators sitting in between, before it ever reaches a residential meter. Where it does reach households more directly is through big industrial users on spot-exposed contracts, and through the cost of the hedging itself, which retailers ultimately price into every plan on the market. The AER publishes its wholesale cost allowance methodology at aer.gov.au if you want the detail on how that pass-through is meant to work.
My mildly contrarian view, for what it’s worth: I think a fair amount of political energy gets wasted trying to smooth this volatility out entirely, as though a flat wholesale price curve would be a sign of a healthy market. It wouldn’t. It would be a sign nobody’s being paid properly to show up during the hours the grid actually needs them. Cricket tragics will recognise the type of argument. Nobody complains that a fast bowler only gets wickets in short, violent bursts rather than a tidy one-per-over average across the whole innings. The bursts are the job. Wholesale electricity pricing works the same way, whether the public debate wants to hear that or not.
The swings aren’t going away as more wind, solar and batteries join the grid. If anything, they’ll get sharper at the margins even as the average price softens. The number worth watching isn’t the average anymore. It’s how wide the daily range gets, and who’s actually being paid to stand in the gap when it does.
– Marcus Wren, Editor
Photo by Fré Sonneveld on Unsplash