A new report claims to have found “demonstrable evidence” that South Australia’s power prices have been artificially inflated by the state’s oligopoly electricity generators that it accuses of “gaming the market” and increasing their margins four-fold during the recent “energy crisis.”
The Melbourne Energy Institute (MEI) report, commissioned by the Australian Conservation Foundation and released in full on Thursday, said that concerns about the exercise of market power in South Australia had been evident in relatively low levels of liquidity.
It said there was “demonstrable evidence” of the extraction of what it calls monopoly rents by some generators, arguably through withholding of capacity.
According to the report, generators do this by choosing not to generate electricity for a period, to push up prices, then boosting output to get higher rates – and it claims to have identified 41 occasions where this practice occurred at a single South Australia power station in 2015.
“By carefully choosing when to supply electricity to the grid and when to withhold supply, the generators are making a fortune,” the report says.
Indeed, in the two months since mid-June 2016, MEI claims that South Australia’s electricity generators made between $40 million and $60 million by restricting supply to raise prices, without fear of competition from rivals.
The findings come in the wake of an “energy crisis” in the state which saw the average margin for electricity supplied to the grid go from $18.74/HWh in mid-June to $70/MWh.
This would not be the first time that the power of generators operating in a market with little competition has resulted in higher prices. A recent Queensland Productivity Commission report noted that some $170 million had been added to wholesale prices in Queensland in one quarter last year because or bidding practices. South Australia is seen as equally vulnerable because of the lack of competition in the market.
Such bidding is not necessarily illegal, simply a product of market power. But South Australia energy minister Tom Koutsantonis has asked competition authorities to look at it. The Australian Energy Regulator is also conducting regular reports, but is yet to reveal its investigations into the biggest price spikes from last month.
Those price spikes were blamed by many in the media and conservative political circles on the state’s nation-leading uptake of wind and solar – a charge the MEI report has rebuffed, finding that South Australia’s electricity would be even more expensive if renewables weren’t in the mix – others, including Tom Koutsantonis, have argued that the state’s non-competitive or “broken” gas market has been largely to blame.
Koutsantonis, who has come under considerable pressure over the latest high price event – particularly for his government’s ambitious roll-out of wind and solar – has described the national energy market as a train-wreck, and aired ambitions to break the market dominance by reframing rules, adding new interconnections, and introducing yet more renewable energy technologies.
As we have noted here on various occasions, the price spikes South Australia has experienced over the last couple of months are not new to the state – certainly, they pre-date its high penetration of renewables. Nor are they particular to South Australia.
The Queensland gas market has raised similar concerns. As Davide Leitch wrote in this column in May, “at today’s spot gas prices even an open cycle gas generator (in Queensland) could expect to make over $80 MWh gross profit every day” during the peak afternnoon, early evening period of 3.30pm – 7.30pm.
But as Leitch also points out, “this is the way the market is supposed to work. High prices provide a signal that demand exceeds supply and that there is an investment opportunity.”
Still, even Australia’s energy market regulators and operators concede that the current structure results in “perverse” outcomes, and are calling for changes.
ACF’s CEO Kelly O’Shanassy said next week’s meeting of state and federal energy ministers was the perfect place to kick start a coordinated national plan to transform Australia’s energy system and address the lack of competition in South Australia.
“South Australia’s situation is different from other states, with a lot of renewable power and concentrated market power,” she said. “A coordinated national plan can help clean energy grow while avoiding the price spikes we’ve seen recently in South Australia.
“ACF is encouraged by AGL’s plans for a network of 1,000 residential and business battery storage systems, which will improve grid stability.
“South Australia should go further – a big solar thermal plant with storage would deliver power day and night and challenge the monopoly of gas generators.
“A growing chorus of voices – including the Australian Industry Group, the Grattan Institute, the Clean Energy Council and major electricity generators like AGL – is calling for a coordinated national approach to energy transformation.
“The clean energy revolution is here and it’s unstoppable. But it needs a plan to avoid disruption, look after communities and stop power price spikes that happen when companies play the market.”
