Volatility

The NEM is one of the most volatile electricity markets in the world. This is due to several factors, but can largely be attributed to a combination of market fundamentals and market design. Market fundamentals that impact volatility include a fleet of ageing coal plants that experience frequent outages, and a stringy transmission grid that can often be heavily constrained. Market design aspects include 5 minute settlement periods, a high price cap, and the lack of a capacity market. This means that peaking assets have to make the majority of their money in the energy spot market through very high bids. The most volatile periods are usually caused by outages of large coal plants or key transmission lines, in combination with periods of high demand and/or low wind and solar generation.

To properly capture these dynamics, we model volatility organically by simulating the exact conditions that led to or will lead to volatility. This means forecasting at 5 minute granularity; factoring in generation and transmission outages as well as the impact they will have; properly modelling ramp rates, ramp costs, and start costs; and properly modelling the bidding behaviour of generators - particularly peaking assets such as OCGTs. This is covered in more detail in Thermal generation.