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High energy prices? Blame fossil fuel generators, not renewables

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It seems that you can ask the Coalition government a question about pretty much anything – plunging polls, Donald Trump, Cory Bernardi or even the weather – and the answer will always be the same: “We’re focused on electricity prices.”

Great. But what exactly is the Coalition doing about it? On the evidence to date, not a whole lot, apart from blaming renewables for soaring wholesale electricity costs and promoting something called “clean coal,” despite all the evidence pointing to the fact that coal generation it is not very clean, and not cheap.

smart gridThey are chasing the wrong target.  Australia has experienced some extraordinary high wholesale electricity prices this summer, and most of these price surges have come in states with little large-scale wind or solar.

It is the activities of the fossil fuel generators that are to blame. This is about competition, or the lack of it, and the fossil fuel generators have been going to extraordinary lengths to get rid of competition.

The Australian Energy Regulator has been investigating more than half a dozen “high priced” events, as it is required to do when prices jump above $5,000/MWh. Some of the reports it has already completed make astonishing reading.

Take the events of last November 18 in New South Wales, when the spot price of electricity jumped to more than $11,700/MWh in the mid afternoon, and bids of more than $13,700 were recorded over seven different trading intervals over the course of the afternoon.

These are the sort of levels that have caused conservatives in politics and many in the media to hyper-ventilate about the level of renewable energy in South Australia, and the proposed state-based renewable energy targets in Victoria, Queensland, and even the Northern Territory.

But here’s the irony. The number of high-priced events in Queensland so far this year are 40 (yes, forty) times more common than in renewables-strong South Australia. Did we hear a peep of protest from the Coalition about this? No.

high priced events

The importance of the November pricing event in NSW is that – like so many other similar events – it shouldn’t have happened; but it did, because two players in the market – Origin Energy and Snowy Hydro – without breaking the rules, were able to game the market and eradicate competition.

This is how they did it.

According to the AER, there was a network constraint on the border between NSW and Victoria. These constraints are imposed when there is a risk of a network overload, and because of the way the constraints work, it means that the generators in NSW act as sort of “gatekeepers”.

If they increase generation, then it forces the Victorian generators out of the market, reducing competition.

This is exactly what Origin and Snowy Hydro did. According to the AER report, they bid 3,000MW of capacity to the price floor, flooding the market. That forced the Victorian generators, and most competition, out of the NSW market. It also put some caps on the output of some wind farms.

At the same time, according to the AER, Origin and Snowy “rebid the ramp rates” of their generators down to the minimum allowable by the rules. That ensured that the Victorian generators were kept out of the markets for as long as possible.

And what happened in the interim? Well, the NSW generators had a party. The lack of competition meant they could force prices up to their maximum level over seven consecutive bidding periods.

“The price exceeded $13,600/MWh for seven dispatch intervals from 2.40 pm to 3.30 pm, inclusive,” the AER notes. You can read more about that incident here.

This was not an isolated incident. An unplanned outage on the interconnector linking Victoria to South Australia on December 1 invoked a similar constraint on that link.

You may remember, this was a few hours after a network fault in Victoria caused a widespread blackout in South Australia, leading to the government and many in the media to blame renewable energy once again.

According to the AER, Origin Energy unexpectedly fired up its Mortlake gas power generator at 10am, when the link was still under constraint, forcing imports from Victoria out of the market, and allowing the South Australian generators to have another pricing party, unencumbered by competition from interstate.

According to the AER, the actions by Origin Energy helped force the market price up to the cap, and the price for the 30 minute interval to $9,175/MWh.

The party didn’t last long because the Australian Energy Market Operator instructed Origin to switch Mortlake off, because it was causing grid stability issues. Prices then dropped sharply. You can read more about that here.

This lack of competition was the very same factor that drove prices sky-high in South Australia in July, when the interconnector was restricted for planned upgrades.

And it is this similar lack of competition that has underpinned the extraordinary price rises – higher and longer lasting than South Australia – in Queensland these past few months.

See that table above again, absorb the fact that prices in Queensland this year have been as high as they were in South Australia last July when the link to Victoria was being upgraded, and wonder about the absence of conservative outrage.

As we pointed out, the AER is currently investigating around half a dozen high-priced events. Even though the average of late afternoon spot prices has been more than $1,000/MWh in Queensland, a price event is not investigated by the regulator until it gets above $5,000/MWh.

The market players know this and bid accordingly.

But it goes to a fundamental point in the debate about electricity prices. This has nothing – nothing –to do with renewable energy, its costs or its variability.

It is solely about the pricing power of the fossil fuel generators, most of them owned by the retailers who insist they are acting at all times in the best interests of their consumers. Here’s some more reading on that here, and here.

South Australia and Queensland have typically been the markets with the least amount of competition. But the proliferation of wind energy in South Australia has changed that, and the fossil fuel generators have only been able to party – like they used to a decade ago when such high-priced events where nearly a daily occurrence – when there are network problems.

In Queensland, however, there is little large-scale renewable energy capacity, although the construction of half a dozen large-scale solar plants in the next few months may change the market dynamics this year. Maybe that was why the government-owned generators have been so keen to profit while they can.

There is no doubt that more renewables, and more competition, will reduce that pricing power. That is a given.

But the Coalition and many in the mainstream media simply don’t want to know. They have barely reported on the high-priced events in Queensland and NSW, or on the real cause of those events in South Australia.

They don’t want to know: politics and ideology are at play.  

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  • Andrew Thaler

    Finally. Some acknowledgement of what is happening. About. Bloody. Time.

    If an idiot like me can see what is happening even with my limited access to information and real data.. then smarter people should be much wiser to the facts.

  • Leigh Ryan

    Just like Petrol a massive scam in which the government and it’s individual members are without any doubt complicit, that’s corruption chuck em all in prison.

  • Steve159

    Just been watching question time in the federal parliament.

    Huge attack by the LNP on the high cost of renewable energy, destroying jobs, pushing up electricity prices, ad infinitum.

    Not one word by Mark Butler in response. Can’t see if he’s in the parliament at the moment.

    Not one word by the opposition to refute such blatant untruths (they could easily quote the facts presented on this website).

    Unbelievable.

    • Ken Dyer

      Yes Steve, and that is why Question Time is an absolute joke. That diatribe by Frydenberg was in response to a Dorothy Dix question asked by a Liberal backbencher. This is what the debate about renewable energy has been reduced to in Australia. Until the Liberals actually do something about the rorting of the system by the fossil fuellers (don’t hold your breath), you will not get a sensible argument about affordable renewable energy in this country.

      Oh, or should I say that until this sort of statement goes mainstream:

      “A report published last week by Bloomberg New Energy Finance showed that
      new ultra-supercritical coal would be the most expensive form of new
      energy supply in Australia, well above the Levelized Cost of Energy for
      other sources such as wind, solar, and natural gas.”
      And
      “Specifically, Bloomberg reports that the Levelized Cost of Energy (LCoE)
      of new ultra-supercritical coal-fired power in Australia sits at
      AUD$134-$203/MWh. This ranks well above the current LCoE for new build
      wind(AUD$61-$118/MWh), solar (AUD$78-$140/MWh), and combined-cycle gas
      (AUD$74-$90/MWh).

      So, until the Liberals come clean (bit hard when you muck around with coal), no one will be told the truth, that coal now costs nearly twice as much as solar, and more than twice as much as wind.

      • Steve159

        I’m aware of the high cost of “clean coal” etc — what amazed me is Labor letting each untruth go unchallenged.

        wtf? are they totally incompetent?

        • DJR96

          Yep!

        • Chris A

          What are they going to say? That the QLD labor government are allowing their state owned generators to rape and pillage with >300% profits above the cost of generation? Unlikely. The Renewables debate in my view is separate argument to the total toothlessness of the Australian Energy Regulator. That’s a serious Federal issue which nobody is asking the right questions of. We are probably going to just get a bunch of reports saying how the criminals stole the money but all within the rules so nothing to be done.

          • DJR96

            The Qld state labor government is taking 100% of the profits from Powerlink, Energex and Ergon. It’s a huge part of the state budget. They’re desperate and won’t be reducing their demands any time soon.
            Unfortunately, the gas generators aren’t government owned but are the ones responsible for pushing up the wholesale price. The state owned coal plants still reap in the bonus high prices though.

          • hugh grant

            This article exposes the extraordinary profits that the Queensland government is realising from the Queensland networks.

            http://reneweconomy.com.au/ok-regulator-ignore-electricity-networks-extraordinary-profits-54813/

          • Chris A

            No. That’s only partially correct. Gas is pushing up the baseline price to marginal cost of gas ~$110/MW. Relentless Market Cap prices in QLD are from generators bidding up to a 1GW of their portfolio from $13k. The regulator needs to get involved to stop “consumer harm” as per their mandate.

          • DJR96

            Thank you. So it’s even worse than I thought.

            The AER and all industry participants need reminding of what the National Electricity Objective actually is.

        • stalga

          Me too.

      • DJR96

        Send an email with a link to that report to your local federal member. I did!

        • stalga

          Mine just got one. Freydenberg and the PM’s office will get written correspondence.

        • Robert Comerford

          Mine’s the balmy choice. Perhaps a wasted effort if I did :>)

    • Alex Peterson

      Debate light with facts, heavy with volume very disappointing. I trust Mr Finkel will sort this lot out

    • JeffJL

      Why are they not doing anything. Because it is question time and they cannot.

      Statements made to correct the record are not reported by the media.

      And the media spend hours and millions of words discussing why people are tuning out of politics.

      • Steve159

        They (Butler, Shorten, et al) can ask questions like “why are you so blatantly telling untruths about the cost of renewable energy versus so-called clean coal?

        “Why are you (LNP) promoting clean coal when analysis shows it is the most expensive form of new energy?

        There are countless similar questions that could be asked!

        They could hammer the LNP relentlessly, showing them the fools they are!

        • JeffJL

          They do.

    • FIFO69

      Funny how facts can shut people up like that

  • Rod

    We, in SA, have a forecast $14,000 for tomorrow at 5pm. Just as the solar input will be waning. Pay me more and I’ll stick some Western PV on

    • MrMauricio

      have done that-got East North and West on the go-works a treat!! 8am to 9 pm

      • Rod

        My point exactly. Encourage more E/W residential PV and large scale single axis tracking (Especially to SA’s West Coast) and we would not have had the load shedding we had this afternoon/evening and $13,400.01/MWh price gouging. A much quicker and cheaper solution than storage.
        Maybe more load shedding will accelerate storage uptake though!

    • Chris Fraser

      Haha. Whether for your FiT account or your own consumption … you still win.

      • Rod

        Unfortunately or fortunately, whichever way you look at it, I’m on PFiT for a while longer. Can’t increase my existing system.
        Next steps, a stand alone storage system, so I can share more of my green energy with a grateful grid.

    • stalga

      It happened 24 hours earlier than you predicted, $13,600 I believe. Groundhog day on Thursday.

  • DJR96

    OK, here’s a burning question of mine.
    The generators place their bids into the market, the capacity and price. AEMO then dispatch the required energy from the generators on a lowest price bid first basis. So far so good. But when another generator with a higher price bid is dispatched, ALL the operating units receive that same higher bid price – not what they bidded at.

    So when late in the afternoon and a gas peaker plant is needed for just an hour say, all the generators are getting paid the exorbitant price that peaker plant is getting paid.

    And then to make matters worse, one company may own several generator units including base-load coal and gas peaker. If the market looks like it’s getting close to requiring the gas peaker to be dispatched, that company might call AEMO and say ‘sorry, one of our coal units broke down and is out of action’. AEMO then has to dispatch more generation of course – guess who is next in line to be dispatched? And then it’s remaining coal units are also getting paid the same rate as the gas peaker plant. Thus said company can easily manipulate the market. Quite frankly it’s a freaking rort!!

    So why doesn’t a generator just get paid whatever price they bidded at?

    • JeffJL

      Easy. Why should I as an efficient producer be paid a lower price than an inefficient producer for the same product.

      As discussed in the article. Competition would eliminate the scenario you describe. They do not even have to claim that the unit broke. They just bid higher and/or offer less in the next period and the price goes up.

      • DJR96

        On the face of it that may sound fair.
        However, if they only got paid whatever they actual bidded, they would have to provide a much more genuine bid instead of riding the coat tails of higher bidders. The higher bidders run the risk of not being dispatched and not getting paid, that’s their risk to manage.

        If they want to participate, play fair. They can’t be rigging the game at our expense.

  • hugh grant

    Thanks Giles

    Why isn’t the mainstream media calling out the Coalition on their blatant misrepresentation of the key drivers of electricity prices?

    The key driver of Australia’s electricity price increases has been the unnecessary growth in network charges (transmission and distribution) which now account for around 60% of consumers’ electricity bills and are delivering extraordinary profits to the networks’ owners.

    The Coalition only ever talks about generation costs (which only account for around 20% of the bill) due to their ideological opposition to renewable energy.

    • DJR96

      Because the transmission and distribution is all State owned. Can’t have whole State economies falling over now can we………

      • Chris A

        If summer prices stay up at $200/Mwh then its going to be a lot more than 20% of your bill in the future Hugh! That argument is exactly what generators want so that scrutiny gets deflected to the networks.

        • hugh grant

          Not sure about that Chris. The networks’ prices are set to sharply rise again as interest rates rise.

          • Chris A

            6c/khr ($60/MW) to 10c/kwh ($100MW) on a 25c bill is going to be a ~15-20% increase. Add on network increases and it will be well and truly game over vs PV and battery storage. Bye Bye!

          • hugh grant

            Yes Chris – ‘business as usual’ for the electricity sector is completely unsustainable. Why isn’t the mainstream media exposing that fact?

      • hugh grant

        But the networks are not state owned in Victoria and SA. Yes, the state governments in the other states are addicted to the extraordinary returns from their state owned networks and that obviously influences their approach to ensuring toothless regulation for the networks. Why aren’t the Victorian and SA governments more vocal about the need to address the failure of network regulation?

      • stalga

        I was beginning to suspect that myself, good to hear it from someone higher up the food chain.

    • MaxG

      Because they are owned by the corporations who peddle the neoliberal bullsh!t in bed with the numnuts and liar party…

  • Ian

    What an amazing story. I always thought that the utilities priorities were wrong. The electricity network was originally set up to provide electricity for the benefit of the Australian people, but it looks like it is actually used to extract the most money from people . When house hold solar started to impact on the utilities business model they fought tooth and nail to limit this trend. The utilities view of their customers as cash-cows is beautifully illustrated by this article.

    • Barri Mundee

      “The electricity network was originally set up to provide electricity for the benefit of the Australian people, but it looks like it is actually used to extract the most money from people”.

      I think that is a valid conclusion and unfortunately not limited to the electricity industry. What should happen?

      • Ian

        Glad you asked. Any solution is multi-pronged. 1. As a customer of the grid, install solar and storage, install insulation and either solar hot water or heat pump water heating with storage and other energy saving initiatives as a hedge against price rises. 2. Consider EV ownership with V2G capabilities as a measure to go completely off grid and still have standby storage or power source 2. As a voter choose a vote against FF and for renewables, amongst other priorities. 3. Invest in renewables-friendly companies 4. Support renewables media, &c.

        The winds of change are favourable for renewables we can expect a few jibes and tacks as we sail this course.

  • Jonathan Prendergast

    Rebidding and gaming activity by generators. The smartest guys in the room…It would be illegal in America!

  • Greg Hudson

    I thought that Uber had the market cornered on ‘surge pricing’ but theirs is chicken-feed to what the gas peakers have been doing lately. $13868/MW come off the grass…

  • Les Johnston

    Newsworthy article highlighting market failure. When people notice electricity bills are increasing, there seems to be a gap in logic identifying the cause.

  • solarguy

    If EA, Origin, AGL etc, get a critical mass of solar and wind generation installed over FF generation, won’t there still be the possibility that they could game the market as they do now?

  • Steve

    How about today’s AFR article on future grid that has an incredibly deceiving LCOE chart showing asterisks conveniently placed at sub $50/MWh for “technologies not considered” making it seem those technologies are all sub $50.
    At the assumed $6-10/GJ cost for gas, the fuel cost alone in a CCGT of 40% efficiency ranges from $54-90/MWh, which is where they’ve placed the full LCOE. Last I checked CCGT plant capital costs and O&M costs are far from negligible. Ridiculously inaccurate and deceiving. https://uploads.disquscdn.com/images/3c21bd6c6315b8f3e6e2ec819ef42e7f50583114d406b10a08ed24804532237f.jpg

    • Chris

      The chart comes from a CSIRO report published in 2015 which means it is probably a bit dated.

      • Steve

        The 2016 report isn’t available on the CSIRO website, but the 2015 one online has no asterisks like on the AFR article. Still doesn’t change the simple fact that the $6-10/GJ assumption they have on the chart represents a fuel cost identical to what they claim is the LCOE, no matter what year we’re in. Somethin ain’t right there.

  • Barri Mundee

    How about something really radical: ditch the so-called electricity market which is neither free not fair and too often produces perverse outcomes.

    There must be an alternative way to run the system?

  • David Pethick

    Aggressive bidding by generators during periods of high demand has been going on for well over a decade. I think a couple of points are worth emphasising:

    * The electricity market is a zero sum game. Wholesale market participants bear all of the spot price risk – for every winner, there is a loser.

    Because of this, VoLL price events are usually short lived. Often greed kicks in – the high price attracts volume from anyone that has excess generation that is not being dispatched. The gentailer that has sold more power than they are generating (aka “short”) will do everything they can to keep prices down. At other times, AEMO changes the constraint sets so that the market clears more efficiently.

    * High spot prices and volatility are good for renewables and new technologies. They create an opportunity for renewable energy to be built and operate on a merchant basis, or to enter into a PPA. Witness the significant uptick in the last 6 months in the number of PPAs being signed. Utility scale storage such as batteries and pumped storage are a non-starter without intra-day and inter-day price arbitrage opportunities.

    In short, we’re stuck with coal if spot prices are stuck at $30/MWh.

    So – bring on high demand, transmission constraints and high spot prices. It’s the catalyst for change.

    Cheers.

    Dave P.

  • neroden

    This is Enron. Remember Enron caused a blackout in California — deliberately — to make money.

  • neroden

    I think we misunderstood. The COALition is focused on keeping electricity prices *high*. 🙂

  • Wayne

    This is clearly, one of the most important articles on climate and SA/Aust. electricity ever. Thanks Giles.
    Shows up the hypocrisy of this LNP farce of a government, their Lib counterparts in SA and those fossil fuel shills on the attack about anything, other than coal for power generation. Fossil fuel in panic with stranded assets and the sooner the better.