Competition vs. Coordination: Optimising Wind, Solar and Batteries in Renewable Energy Zones

Decarbonising Australia's power system requires high market shares of variable renewable energy. An important policy initiative to achieve this is the establishment of Renewable Energy Zones (REZs). As renewable market share increases, spilled energy within REZs is predictable. Spilled energy occurs due to high peak-to-average output ratios of intermittent renewables (being ~3:1), largely inelastic aggregate final electricity demand, and the economic limits of REZ network transfer capacity. In an open access, multi-zonal market setup, an intuitive response by policymakers may be to undertake connection reform (i.e. priority access) and underwrite storage assets to alleviate the worst effects of spilled energy. Prima facie, spilled energy and lines congestion may be reduced, and wind and solar capacity increased, through the deployment of battery storage. However, as model results in this article reveal, priority access makes multi-zonal markets more sensitive to spilled energy, and competitive batteries within a REZ aggravates congestion. Further, early entrant batteries may oversize their MW capacity and crowd-out renewables. All these cases harm welfare within a REZ. Optimally sized coordinated 'portfolio' batteries alleviate congestion because they don't compete for scarce REZ transfer capacity. Rival batteries should be located outside REZs.