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Greedy energy industry, too clever by half, kicks an own goal

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The South Australia state government is beside itself with fury. Having been left out on a limb once again by the actions, or inaction, of the Australian Energy Market Operator, it is threatening a “major intervention” into the energy markets.

Just what this might entail, who knows. “It will be dramatic,” promised premier Jay Weatherill, who refused to rule out “nationalising” the system.

Not sure what that means but it could mean assuming the right to instruct generators to go on-line, rather than sitting idle as thousands of consumers and businesses have their power switched off in rolling blackouts.

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If such a thing did occur, then the private players in Australia’s energy markets only have themselves to blame. Time after time they have proved greedy, manipulating prices to maximise profits, and then fighting any rule changes that might see a more efficient, cheaper, cleaner and smarter grid.

“We are seeing the electricity industry commit an own goal here,” says Tristan Edis, an energy markets expert with Green Energy Markets.

“The Energy Supply Council started the process of politicising energy supply security back in October 2015 through their misleading PR campaign promoting fear of South Australia as an “accidental experiment” in too much renewable energy.

“The goal was to defend existing generators’ profits from policies that would promote zero emission renewable energy consistent with the Paris Climate Accord.

“But the campaign took on a life of its own in the hands of the media. The end result of their campaign is panicked and opportunistic politicians from both sides talking about ‘dramatically intervening’ in the market and forcing the construction of great big new coal generators.

“These pose potentially bigger and highly unpredictable threats to electricity businesses and the investment environment than policies that sought to steadily decarbonise electricity supply,” Edis said.

The most disappointing aspect of the current energy debate has been the politics in Canberra. The Coalition has launched a campaign of half-truths and outright lies to demonise renewables, and even brought a lump of coal into Question Time on Thursday to support its attacks on wind energy.

On the other side, Labor has shown itself to be stunningly incompetent in holding them to account – even with the reports from the CSIRO and Alan Finkel at hand.

Indeed, there is fear now that even though Finkel understands what’s going on, and seems determined to speak his mind, that his report will be marginalised in the same way the work of Professor Ross Garnaut was a few years ago.

It is instructive that the Coalition – for reasons known best to themselves, or their fossil fuel backers – have chosen to focus on Finkel’s reference to ultra-critical coal-fired power stations. Yet Finkel spent no more time on USC than he did on wave energy or solar thermal.

The Coalition already has taken his report completely out of context, and ignored his observations that the technology to deal with a grid with high renewables is readily available. But as Edis points out, this has been abetted and encouraged by the incumbent industry.

“Instead of attacking and demonising renewable energy via the media, the industry would have been better served working cooperatively with state governments and also the federal government to iron out the bugs of decarbonisation policies that were on the table,” Edis notes.

But this is a problem across the energy industry. The generators are using their market power – hooray says the regulatory chief, Rod Sims of the ACCC – to extract maximum profits.

The networks, both private and government-owned, have been doing that for years, which is why Australian consumers have the highest electricity prices in the world. And the retailers, as we will reveal on Friday, have been similarly exploitative.

The rule makers and the regulators have done pretty much nothing. They have allowed an opaque and obscure market to take hold, have been slow on reform, refused rule changes, and been lax on regulation and punishment.

On Wednesday, RenewEconomy highlighted how actions by Origin Energy and Snowy Hydro had deliberately forced out competitors from the market so that higher prices could be achieved. Apparently, this is also perfectly legal.

And when generators do get caught doing something wrong, they get barely a slap on the wrist. The AER last year imposed fines on two companies for disobeying market rules. The fines didn’t even cover the excess profits made from their misbehaviour. Not so much a penalty, then, as a profit share arrangement.

The CSIRO and the energy network owners were right, last year, to warn of mass defections from the grid. Consumers have had enough. They have, or will soon have, the technology available to look after their own needs and will be able to tell the big utilities to get stuffed. And they will be perfectly justified in doing so.  

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  • Paul

    The comments by the SA Premier are not helpful. While intervention in the market in this instance won’t hurt renewable providers, it does send a signal that regulatory risk is a real problem and may be encountered by renewable producers down the track. If that takes root no one at all will invest in the market and we know Governments do not have the capital to do so. Where will future investment come from?

    • Brian Bartlett

      Where will future investment come from?

      Easy answer, the people. Apart from reducing consumption by installing energy efficient devices we are also installing our own solar power. Next step is to install batteries. The future is looking good.

      • Hayden

        I’ve already taken the next step. Solar backup batteries about three months ago. Don’t buy their product any more. They can all go to blazes.

    • Steve159

      “The comments by the SA Premier are not helpful.” to who?

      The vested interests behind the LNP promulgating outright lies?

      • Paul

        I don’t care for politics. I hope my comment wasnt seen as political. I think that the capital required by the energy infrastructure of the future is challenging and any risk to investors will result in higher coist to the energy users. Its not a magic pudding.

        • Steve159

          far more damage (risk to investors) has, and is being doing by the LNP towards renewables.

          We have enough renewable resources to be 100% (with pumped hydro, grid-scale batteries, and enough wind-farms to provide consistent power). Singling out Weatherill does imply a political stance, in view of the LNP’s blatant bias.

    • Rod

      I can imagine a Government buying a supposedly mothballed gas peaker and running it when absolutely needed to cover shortages and reduce price gouging. Maybe a dedicated bond to finance it.

      • JonathanMaddox

        And direct government investment in storage, or solar thermal with storage.

        • Rod

          Yes, a bit of assistance to the CSP project at Port Augusta would be a vote winner and provide enough storage to reduce the duck curve.

    • JonathanMaddox

      Competition from the public sector is not exactly regulatory risk.

    • Chris Fraser

      I’m more optimistic. Investors are fairly seeking shelter from regulatory risk. This can be achieved by allowing their large plant (which is usually funded 10% CEFC and 90% private equity) to operate profitably on the 360 milder days of the year that are not heatwaves and AEMO has no need to throw the spanner in the load shedding works. The SA government can’t maintain its forthcoming extreme peaking plant at a profit, however it has a legislated energy role and should satisfy public (read voter) expectations for energy security. This would help the RE investment environment. I say good on SA for outlining the market failure problem.

  • Jonathan Prendergast

    How about a battery incentive scheme. 25 c/kWh FiT between 4pm and 8pm for 5 years, and maybe some up front cost subsidisation.

    Limited to certain numbers to both geographically in the SA grid so it spread around or in targeted constrained areas. Also limited in numbers so it doesn’t get oversubscribed and expensive. See how it goes, revise and go again if more is needed.

    It would stimulate the local battery and solar industry and also provide enough scale so other support business models can develop. And of course, support the grid and hopefully reduce blackouts.

    • Rod

      Good idea, but that would mean signing up for time of use rates?
      I personally would steer away from them.

      • Greg Hudson

        TOU rates are ideal if:
        1. You have solar, and no battery.
        2. They MAY also be useful if you have a battery, but no solar (charge during off peak, and use battery during peak).
        3. TOU with both solar AND a battery.

        You can even go further by also adding a REPOSIT device, and send your power to the grid ‘when’ there are price surges (just like Uber). There’s a surge coming today in Qld (11 Feb 2017 at 2:30pm to 8pm). The Qld Govt is screwing with pricing again. See:
        https://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Data-dashboard

        • Rod

          TOU as I’ve viewed them are biased towards the Retailer in most instances.
          Their idea of peak and non peak defies logic.
          The actual peak these days would be 4pm – 8pm however the times people pay peak rates might be from 12pm – 10pm!
          Make it fair and they may get more interest.
          If I were paid more to export during their “peak” count me in.

          • Greg Hudson

            Peak rates vary from retailer to retailer. Mine says peak is 7am-11pm M-F.

          • Rod

            Exactly. That is not my idea of peak.
            TOU may work for some but I would suggest people do their sums before voluntarily changing over to TOU.

    • Brunel

      Only if the batteries are made in AUS.

      • Jonathan Prendergast

        It would be great to have Australian made batteries wouldn’t it.

        It would be a challenge to set up such a manufacturing plant due to the small scale of the Australian market I assume.

        • Brunel

          The LNP would rather build 12 submarines at colossal expense instead of getting a gigafactory here.

        • Greg Hudson

          Australia has the highest % of home based PV installations (per capita). Our battery market is just as big if not bigger.

    • Greg Hudson

      Why do so many people think subsidies are the answer, when it is the reduced or eliminated power bills that are the big dangling carrot. IMO eliminate ALL subsidies, including all FF subsidies, and see how the big petrol companies fare in a level playing field…

      • Jonathan Prendergast

        I agree that subsidies aren’t ideal. But I also think clever tariff design can drive behaivour we want that would bring down the cost of supplying energy and benefit all.

        For example, I installed an electric hot water heat pump at home, and reduced by hot water electricity consumption from 8 kwh/day to 2 kwh/day. For a $2,500 net investment, $500 saving per year. No brainer?

        And if all those with electric hot water did this around the country did this, it would 100% offset the generation loss by Hazelwood closing down. And it simply isn’t happening! A similar story with LED lighting.

        In cases like this, government and regulators can play a role, whether through subsidies or other means.

  • Steve159

    Giles, thank you!

    A timely, forceful article.

    Especially this ” Labor has shown itself to be stunningly incompetent in holding them to account – even with the reports from the CSIRO and Alan Finkel at hand.”

    Agree.

    • Jimbo

      Too true Steve. It is only Labor who could ever step up here and put their policy of 50% renewable power in place but they are too timid to enter this debate. The media including the ABC will peddle their half truths and eat Labor alive. Shorten needs some guts right now, or should step aside.

  • Ray Miller

    Market failure again! And we paid $100’s of millions for this system go figure. The spiral to the bottom just shifted gear.

  • lin

    Thanks Giles for another excellent article.
    “The fines didn’t even cover the excess profits made from their misbehaviour.”
    It’s like charging bank robbers a 30% tax on their take, and then expecting them to abide by the law in future. Come to think of it, the government are more likely to let the robbers in the banks move their profits to a tax free jurisdiction and pay no tax at all. Our representative government is not representing us. Small wonder people are furious at our mainstream political parties.

    • Brunel

      So it is like the 457 visa rort.

      A boss can underpay staff and if caught, he just needs to pay backpay. No jail. No $100k fine.

      • stalga

        That’s not entirely true. You can be fined and be made to reimburse. I know of a shop owners who copped a large fine.

        • Brunel

          Sub $100k fines are not enough – we are stilll getting news articles about wage-stealing bosses. Some bosses even make threats to kill!

  • Gary Rowbottom

    Well said. Keep repeating it to our nations leaders, eventually they should take notice.

  • Craig Allen

    The fossil fuel industries have decided that they can’t let South Australia succeed with renewables because that would demonstrate to the rest of the World that renewables can fully power an advanced modern economy.

    They’re being abetted by Nick Xenophon, the Liberal Party, conservative commentators and think tanks, and sadly now the ABC.

    It’s a fight to the death and South Australia is in the cross fire.

    • Greg Hudson

      I must have missed something… What has Nick been up to lately ?

      • Ronald Brakels

        Xenophon has long believed the rotation of wind turbine blades affects the human brain in a way that the rotation of gas turbines at 50 hertz do not. How does that work? Apparently it’s a kind of magic.

        • Greg Hudson

          Interesting.

  • Ben Courtice

    I recall Enron (remember them?) got in a lot of trouble for acting like our generators currently are doing. If memory serves me rightly, California and others junked the price pool system — that Australia has doggedly persisted with — in the wake of these problems of big players gaming the system.

    The figure that Australia has the highest power prices in the world was an interesting one that I haven’t seen before (that I remember). Is there a source for that?

  • hugh grant

    Another great article Giles.

    Couldn’t agree more with your assessment that the rule maker (AEMC) and the regulator (the AER) have done pretty much nothing and have allowed the incumbents to protect the status quo. Sadly, it appears that this is what their master (the COAG Energy Council) expects of them.

  • Peter Giles

    I agree broadly with your assessement but it is not true that Australian consumers have the highest power prices in the world. Our energy retailers do have very healthy margins though…

  • Terry J Wall

    Gees Giles. Sounds just like the US democrats. Ha ha