New Energy Insights: There’s a New Duck in Town – Part I

This article is part of our New Energy Insights series from our New Energy team. Stay tuned for regular updates and commentary on topical issues across the sector.

Part I – The Rise of Rooftop Solar

The structure of the National Electricity Market (NEM) has seen rapid change in recent years. Sustained low technology costs, governmental support and a shift in investor and consumer attitudes towards fossil fuels has led to an unprecedented uptake of renewable generation in the NEM. Australia is at the forefront of this renewables revolution with the highest uptake of residential rooftop solar installations globally.

However, while the energy transition is moving in the direction needed to preserve our planet for future generations, the influx of intermittent renewable generation over the last decade in a NEM originally designed for fossil fuel generators has created a large disparity in electricity supply and demand depending on the time of day.

In this, the first part in a two-part series, we examine the factors that have led to this disparity worsening over time. In the second part, we consider some of the innovative solutions that are already in train to resolve this issue once and for all.

The Fat Duck

This electricity supply and demand disparity can be summarised as follows: as people leave their homes in the morning and small-scale renewable generation (ie solar) ramps up, electricity demand from the network decreases as more and more renewable energy is generated into the NEM. Then, as the sun begins to set and people return home in the evening, this intermittent generation drops off and network demand begins to peak. If shown on a graph – and with a touch of artistic licence – this MW demand curve resembles a duck, also referred to as the “duck curve issue”.

Chart, line chart Description automatically generated Source: The Hub, AGL

Over the last decade, the graph has shown the belly of the duck hanging lower and lower due to the drop in demand in the middle of the day coupled with the increasing penetration of intermittent renewable generation in the NEM.

The Rise of Rooftop Solar

A leading contributor to this has been the adoption of household rooftop solar (without energy storage) in very large numbers and the lack of a targeted legislative regime to regulate this new form of generation. This has seen the NEM used as a dumping ground for this “dumb solar” in the middle of the day when MW demand is at its lowest. Compounding this has been governmental support for rooftop solar by way of fixed feed in tariffs which apply irrespective of the wholesale market price, resulting in new market demand lows being set almost every week.

For retailers and rooftop solar owners, the knock-on effects of record levels of solar penetration have led to large price swings (including negative pricing) and system inefficiencies across the NEM. This has led to the Australian Energy Market Operator (AEMO) curtailing the amount of rooftop solar that can be fed into the grid, hurting the revenue streams of rooftop solar owners.

Variability in solar generation has also undermined the stability of the grid. Until the relatively recent deployment of energy storage technologies, solar systems did not inherently provide the “system strength” and “inertia” services required to keep the lights on. Such services are currently largely provided by coal and other thermal plants, whose very existence is currently under threat by (amongst other factors) the additional solar generation in the NEM.

5-Minute Settlements

Further driving down the MW demand curve in the short term has been the switch from 30-minute settlements to 5-minute settlements (5MS) in the NEM, which commenced in October of last year (see our articles on 5MS here and here).

The early evidence shows that it is having the impact expected, ie that the market is now favouring fast-moving energy storage technologies, and catching out legacy fossil fuel plants that are too slow to respond to market movements. This has had the short-term effect of inflexible supply (ie fossil fuel generators) either being forced to stay on or taking the financial decision to do so because they are not able to ramp up or down in the time required to react to price spikes in each 5-minute interval.

This will likely exacerbate the duck curve issue in the short-term as these slow fossil fuel generators will continue to pump energy into the grid, accepting the negative prices. However, in the long term, as these inflexible generators either retire voluntarily or due to no longer remaining economically viable, their generation will fall off decreasing the amount of generation being pumped into the grid at the lowest demand period of the day. AEMO has said as much in its latest Integrated System Plan, predicting that coal plants will close three times faster than the industry had expected.

The Duck’s Stiff Neck

With regard to the duck curve’s peak, the surge in demand in the evening, especially in the sunnier summer months, requires the intermittency of renewable generation to be supported by flexible firming energy sources that can react to peaks in demand when generation supply is low. Currently, the intermittency and for the most part, the non-dispatchability of rooftop solar has compounded the issue.

Duck Curve 2.0

The key question is ultimately how to tame rooftop solar so that it can be strategically utilized when energy demand is at its greatest. As with most complex issues, the answer requires the combination of multiple solutions. These can be broadly categorized in the context of the duck curve as technological advancement of energy storage and its continued reduction in cost, the widespread adoption of energy storage technologies at a micro and macro grid level, and most crucially, targeted and effective regulatory reform to facilitate and promote the uptake and application of novel energy storage technologies to respond to peaks in MW demand.

For instance, the increased uptake of household batteries and AEMO’s proposed rule changes facilitating the uptake of aggregated solar and virtual power plants (see our articles on the Integrated Resource Provider here, here and here) should go a long way to coordinating this form of renewable generation so that it is dispatched when required and not simply dumped into the grid. Looking again at 5MS, while the effects in the short term are likely to only increase the arbitrage gap between low and high prices, this will give an extra incentive to renewable generators to adopt or retrofit energy storage to buy low and sell high, thus providing the market with the dispatchability resource it requires to balance demand with supply in the long term.

We will be delving into these various developments and how they are set to flatten the duck curve once and for all in an upcoming follow-up to this article.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.