For all the hand-wringing and outrage in much of mainstream media about the South Australian “energy crisis” and the supposed role of wind energy, precious little attention has been given to the role played by the gas industry.
The soaring price of gas was the main cause of the recent price surges in South Australia – a point repeatedly underlined in reports by the market operators and the South Australian government, and the clean energy industry. Sadly, that has fallen mostly on deaf ears in the media.
An analysis from energy expert and consultant David Leitch sheds new light on how the gas generators profited from the soaring price of gas, and the lack of competition in the South Australian wholesale market, a situation made worse by the severe supply constraints on the main interconnector from Victoria.
Leitch’s analysis of the recent events in South Australia, revealed in its entirety here, shows that the gas generators in South Australia, many of them old and inefficient, cashed in in a big way during the first weeks of July.
Even though the cost of gas rose because of supply issue within the gas network, reaching record highs at several hubs, Leitch’s analysis shows that the gas generators cashed in with increased margins over the period.
Leitch’s analysis is useful because it shows how much each gas generator produced during those two weeks, their cost of generation and the average price received. It also studies the gas cost, the gross margin and the final revenue.
The analysis shows that many of the generators were selling electricity at twice the cost of fuel, taking advantage of the gas industry’s power over the market. Leitch says final profit margins may be complicated by hedging contracts and other costs such as pipeline rental or ramp-up and ramp-down costs, which can be substantial.
The gas generators were not the only ones profiting from the price spikes. The state’s wind farms also benefited, reaping an average $299/MWh over the period, according to Leitch’s data. (Which may or may not explain why wind farm owners and operators have been strangely quiet in response to the onslaught from elements in the mainstream media).
Leitch also estimates that had Pelican Point – the state’s most efficient gas operator, owned by Engie – been operating (it did eventually switch on after pleas from the government when interconnector issues were at their worst), then average wholesale prices would have fallen by $100/MWh or more.
There is still mystery as to why it wasn’t operating. One suggestion is that it may have sold its gas to the export market. An Engie spokesman told RenewEconomy it was because operating was “not economic”.
Interestingly, Pelican Point has applied to the South Australian government for a contract under its “low-carbon” energy tender. Its second unit ceased operating just a few weeks before the Northern power station was turned off for the last time. A 110MW solar tower and storage project is also competing in that tender.
The role of the gas industry has largely escaped scrutiny in most of the reporting on the spike in electricity prices in South Australia. In most articles in the Murdoch media, for instance, gas is not even mentioned as a factor.
But there are also claims about improper bidding practices that may have pushed the cost of electricity even higher. The Australia Institute reported earlier this week that gas generators had exploited “flaws” in the National Electricity Market and had created “obscene” price hikes.
The Australian Energy Regulator is required to investigate all price spikes above a certain level, and issues weekly reports, which can be found here.
The most recent are fascinating reading because they illustrate some of the sudden changes in coal and gas supply that can impact markets – such as the sudden withdrawal of gas generators by Origin Energy because it was “not economic” to switch them on, and the loss of 480MW of capacity at the huge Loy Yang B coal generator, majority owned by Engie, because of “coal supply” issues. The AER said these incidents caused prices to jump 50 per cent in one settlement period.
During the recent price spikes in South Australia, the AER reported in its recent analysis, AGL Energy’s Loy Yang A closed down three units because of “coal quality” issues. AGL has a dominant position in the gas generation market in South Australia.
Interestingly, the AER’s last weekly report on the electricity market was for the week ended June 18. That is more than one month ago, and possibly suggests some of the complexity in its investigations. These reports are normally completed within a week or two.
Paula Conboy, the AER chairwoman, told RenewEconomy in an interview last week that its monitoring process was ongoing.
“We monitor where high price events have occurred, and where they go over a certain threshold, and we publish a report. We make sure they are the result of demand and supply forces,” Conboy said.
Of the recent price spikes, Conboy said: “We are looking into that. To date we have not seen any signs that it was anything but supply and demand forces. We haven’t seen where generators are not following rules. But it takes a lot of delving in to.”
Indeed, when the AER has found malfeasance in the market, it usually takes a year or more to impose any penalties.
These penalties, imposed on a range of generators including CS Energy and Snowy Hydro, mostly for “not following market instructions,” are usually small.
This is despite the fact that investigations reported by the Queensland Productivity Commission (see page 49) suggest that “re-bidding practices” might have added $170 million to wholesale prices in the first quarter of 2015 in Queensland alone.
The AER has identified South Australia as another region where the small number of generators may influence pricing. Indeed, treasurer Tom Koutsantonis has suggested he will ask the ACCC to also investigate any irregularities.
Regulators such as the AER are also supporting proposed rule changes that would change the time-frame for settlement on the electricity market and try to eliminate this rebidding. This will also encourage fast response technologies such as battery storage to be introduced, which the AER believes could help lower costs and remove “market distortions.”
However, these changes are being resisted by AGL Energy, Origin Energy, and other generators, including their principal lobby group, Energy Supply Council, because of the potential impact on their relatively slow responding gas generators.
