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Dirty power games: Coalition steps on the gas

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Yet more evidence has been produced about the dirty power games being played in the South Australian energy market, as fears grow that the federal government is pushing for little more than open season for the gas industry, rather than widespread reform in the National Electricity Market.

A new report, this time from the Climate Council, highlights that the biggest issue in South Australia and other markets is a lack of competition, something that can only be broken open by encouraging new technologies and development and building more interconnections, not developing new gas fields.

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The Climate Council report, prepared by former Origin Energy executive Andrew Stock, estimates that gas generators reaped a windfall $178 million during the recent price spikes in South Australia as they increased margins and withheld capacity to maximise their profits.

It follows earlier estimates by David Leitch, writing in RenewEconomy last month, of a similarly sized windfall for the gas oligopoly in South Australia, and reinforces the findings of the Melbourne Energy Institute and independent analyst Bruce Mountain about the withholding of capacity and “rebidding” at critical times in recent weeks.

The fossil fuel industry, with the enthusiastic support of many in the Coalition and the Murdoch media, has sought to blame the issue on renewable energy, and use the price spikes as justification to remove laws limiting exploitation of coal seam gas, and to slow down the deployment of wind and solar.

“Renewable energy was used as the scapegoat, but prime responsibility actually lies with profit maximisation by the power companies,” Stock writes in the Climate Council report.

Indeed, Origin Energy CEO Grant King this week described the price events as “perfectly normal”, and a factor of supply and demand.

This is true to a point, but the reports all point to the deliberate withholding of capacity and bidding patterns that have worsened the outcome for consumers. They point to the need for more competition and reform to encourage those new technologies that can dilute the power of the incumbents.

And while King argues that no well-prepared business should have been caught short by the price spikes – he says 99.999 per cent of customers should have been hedged – Stock says that these price spikes will inevitably be passed on, as they have been in recent years, through to South Australian industrial and retail customers.

As Bruce Mountain found in his report earlier this week, the issue in South Australia was not a matter of supply – there was more than enough generation on hand to meet demand.

“Renewables were framed,” concluded GetUp, which commissioned the report. “A lack of competition, not a lack of capacity, was to blame. A handful of generators deliberately withheld almost 1000MW of capacity at a time when they knew that they could cash in on high prices.”

Stock further suggests that AGL Energy withdrew three units of the Torrens Island gas plant at the height of constraints from the interconnector and when demand peaked.

“During the most extreme demand days, and further exacerbating already tight supply conditions, AGL declared several of its Torrens Island gas power units, amounting to 570MW, ‘unavailable’ for reasons that AEMO has not fully disclosed,” Stock writes in his report.

“The removal of further gas power capacity compounded already tight supply/ demand conditions in South Australia and enhanced the market position of the gentailers.”

Stock notes that the lack of competition in South Australia and the resultant impact on wholesale and retail electricity pricing is a recurring theme, as it has been identified in reports by the Australian Energy Market Commission and Australian Energy Regulator since early 2000’s.

Little appears to have changed. And it is not limited to South Australia, with Queensland also suffering from a lack of competition from generators and also suffering similar revenue hikes when government-owned generators appear to have acted in concert to push up prices.

The Queensland Productivity Commission cites the instance in the first quarter of 2015, when it estimated that $175 million was added to the cost of generation.

And it is not just on the wholesale market that consumers are being punished. In the first part of Mountain’s report, he says South Australians are being hit with retail bills of more than $650 more than the cost of generation and supply. The add-ons are more than three times as much as the ACT, where prices are regulated.

The dynamics between the energy ministers should be interesting. Four of them – from South Australia, Victoria, Queensland and ACT – have renewable energy policies far more ambitious than the federal government.

They will resist any efforts by the federal Coalition – under pressure from the fossil fuel lobbies – to “rein in” their targets. But it is unclear to what extent they can encourage energy minister Josh Frydenberg to accelerate the policy transition that needs to occur to facilitate change.

Some positives will emerge. The secrecy around gas contracts is to be looked at, and several proposals will seek to make the market more transparent. There is vague talk of facilitating battery storage.

Discussions will also look at how a new interconnector can be financed – as Stock noted, just applying some of the windfall for the gas generators could meet much of the cost of a new line between South Australia and NSW.

But others want more. One analyst wondered “why frack the hell out of the country” and build more gas pipelines when the use of gas is likely to fall in the face of competing technologies such as solar and heat pumps.

The energy efficiency sector says market schemes encouraging consumers to use power more efficiently should be a priority; the Clean Energy Council says the focus should be on delivering a long-term goal of zero-emission energy sector by 2050, as the government has effectively engaged to doing by signing the Paris climate accord. Environment groups say the push should be towards 100 per cent renewable energy in a much shorter time frame.

The Climate Council says the key is to reduce South Australia ’s reliance on expensive gas and to increase competition, and a rewrite of the rules governing the National Electricity Market is also needed.

In addition, more low-cost renewable energy from solar PV, solar thermal, and wind is needed, along with increased interconnector capacity, and encouraging in-state fast response energy storage and demand management (for large energy users).

“Collectively, these initiatives will go a long way to abating the current market power of the gas based ‘gentailers’ in the state (provided they are not the ones who also control these new supply sources).”

Note: AGL Energy issued a statement on Friday to address “inaccurate claims” regarding recent market activity in South Australia.

“On 7 July 2016, AGL Torrens had a unit out of production to complete mandatory safety and compliance work associated with operating boilers and pressure vessels. This unit had been out since 28 June 2016,” it said in a statement.

“AGL Torrens has operated at significantly higher than planned levels throughout winter and AGL has been actively managing outages of units to ensure reliable supply of capacity for South Australian customers.”  

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  • Andy Saunders

    Most gas wells aren’t fracked… just FYI.

    • Matthew Wright

      most gas wells are eventually fracked to get more out of them. So therefore most gas wells are fracked.

      • Concerned

        Actually in Australia,CSG uses horizontal drilling.

        • DogzOwn

          And horizontal drilling means 30 to 40 3 inch holes feeding into 9 inch riser. Delivery can be sticky, per example BrightSource installation solar thermal, to pump hot water down well, to melt waxing.

      • Andy Saunders

        I don’t believe that’s correct (my comments refer to Australia, btw). Fracking a producing well would be done to improve poor productivity, so generally at the beginning of its life. Depleted wells would have poor reservoir pressure; there would be little point fracking them.

        • Matthew Wright

          well work overs often include fracking. More often than not

          • Andy Saunders

            Far from true, in my experience. Not trying to pick a fight…

      • Concerned

        CSG . coal seams.Not fracked,horizontal drilling.

    • Tim Forcey

      Hi Andy: Try to get a gas/oil company to commit to never ever ever fracking a given well… and see what happens. Just sayin’….

      • Andy Saunders

        Tim, you’re probably not going to like this, but imho fracking isn’t, of itself, evil. If done wrong, of course, like most things, it can cause horrible problems, but fracking by itself can be (usually is) quite benign.

        That said, most Qld CSG companies (and that is where the vast majority of the gas is coming from), if told they could never frack anything, would probably squark, then shrug and carry on.

  • Brunel

    “more interconnections”. Build an UHVDC line from WA to NSW.

    It is a case of ignoring new technology such as UHVDC.

  • bedlam bay

    Just looked at my August AGL electricity bill. July increase Supply 8%, Peak 14%, Peak next 10%. Very big scam indeed. Hopefully will hasten move to storage and renewables.

  • Tim Forcey

    HOME HEATING WITH HEAT PUMPS

    Good to see, within this article, reference to heat pumps as renewable energy collectors/producers.

    Already, more renewable energy is collected/produced by heat pumps than by rooftop solar PV, as we illustrated with the 5th chart here: https://theconversation.com/the-cheapest-way-to-heat-your-home-with-renewable-energy-just-flick-a-switch-47087

    These mysterious heat pumps are commonly known on mainland Australia as “reverse cycle air conditioners” – used in heating mode during winter.

    For example, at this Facebook discussion group “My Efficient Electric Home” https://www.facebook.com/groups/996387660405677/ you can see reference today to a Melbourne (Australia) home that was heated with efficient reverse cycle air conditioners via the purchase of around 500 kWh of electricity.

    If that electricity came at an average purchase price of $0.2/kWh, it means this home cost around $100/year to heat. Cheap as chips….

  • john

    The basic story is that the company’s that could produce power withheld a bid to ensure they could gain the system.
    Holding back production ensured they could bid higher and make a mockery of the system which is based upon producer being able to produce at any one time.
    So being able to say No we can not produce, but will produce later meant they could gain once again the system of bidding and get higher prices.
    Which is precisely what has happened is it illegal NO.
    Is it best business practice, NO.
    Is it moral, definitely NO.
    Does anyone care, NO.
    Conclusion got to put up with it old mate that is how it is.

    PS. I think this needs fixing and so do you.

  • Malcolm M

    How is a new inter-connector with NSW going to solve the issue of lack of competition in the SA market ? The line from Broken Hill to Darlington Point has a capacity of only about 200 MW, so a line from SA to Broken Hill would only allow another 200 MW to be imported from NSW, and not enough to break the dominance of AGL in the generation market. And what if AGL built or purchased the inter-connector ? It would be in their interests to build an interconnector via Silverton, because they own the Silverton wind farm development, which is currently constrained to 200 MW because of line capacity to Darlington Point. A line into SA would allow the wind farm to export perhaps another 200 MW into the SA market, while also allowing 200 MW of NSW coal or hydro power into SA at times of low wind. To really break the dominance of AGL would require a much larger and longer inter-connector going at least as far as Darlington Point, and probably as far as Wagga. But for the huge cost of such a long power line, would it not be better to either break up ownership of generation assets (such as our media ownership laws), and facilitate storage systems such as pumped storage hydro.

  • Frank Russell

    The argument that ther is lack of competition sounds like capitalist nonsense to me. Surely the real reason for greedy ecploitation is privitisation. Fix the price and ban speculation.

  • Askgerbil Now

    Extreme spikes on electricity prices are the result of Australia’s energy policy.
    California had a similar system that it scrapped about the same time Enron’s CEO Jeffrey Skilling was jailed for 24 years for manipulating electricity supply and price.

    NSW had a few spikes in electricity price in 2011. On 2 occasions in January and February 2011 the wholesale price of electricity exceeded $10,000 per megawatt-hour. The normal price was below $50 per megawatt-hour – which is just 5c per kilowatt-hour.

    AGL reckoned it could make a profit from a $1.5 billion gas-fired power station that it planned to leave idle for all but 200 to 400 hours a year.

  • DogzOwn

    Our market system was John Howard copy from USA(before Enron). Just checked FERC to find, in comparison with our rate cap of $14,000/MWh, their is just $1000. Does this suggest a remedy to reduce ripoff?