Analysis of the influence of renewable energy and BESS on electricity market price formation: a decomposition approach with NIC, OIC, and CIC

In recent years, the integration of renewable energy and battery energy storage system (BESS) has been reshaping price formation in electricity markets because of their distinctive roles. These technologies increasingly act as price setters (marginal units), thereby altering the dynamics of price formation. To evaluate price formation in the Australian National Electricity Market (NEM) more precisely, we introduce new metrics—Negative Incremental Cost (NIC), Offset Incremental Cost (OIC), and Core Incremental Cost (CIC)—to decompose price formation with respect to an additional 1 MW of demand. Applying these metrics to NEMDE Price Setter data from 2021 to May 2025, we find that deviations of energy market prices from core price setters’ bids occur predominantly around zero prices. Renewable generators submitting negative bid prices sometimes exert upward pressure on prices, whereas BESS on average behaves in the opposite direction. Our analysis shows that the proposed decomposition framework provides a novel perspective for understanding the mechanisms behind price deviations and the contrasting contributions of renewable energy and BESS to price formation in electricity markets.