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How gas generators cashed in on South Australia’s “energy crisis”

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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.

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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.  

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  • Am I reading the table correctly? AGL made $100 million gross profit from Torrens Island alone in 18 days?

    • Jon

      In fact it’s probably more than that given they run about 30% of the wind farms in SA as well.

    • juxx0r

      Nope you’re not it clearly states 100 milli dollars, or about ten cents.

  • Jon

    Why does this article suggest profiteering when David Leitch’s excellent analysis clearly says “Gas generators are not profiteering at least not in South Australia”? Sure, the generators probably made a lot of money over the period but they also often lose when prices are low and they can’t switch off. Don’t often see that reported! We need strong wholesale prices to encourage new investment in wind, solar and storage technologies. Let’s not bite the hand that feeds us.
    I think I’ll stick to the real facts reported by David Leitch.

    • There is a significant difference between profiting and profiteering. One of them would be illegal, at least under AER rules. Interesting that the South Australia government has asked regulators to investigate.

  • Geoff

    A totally expected cockup. Giles what don’t you get about on demand base load energy?

  • stalga

    I note that the wind farm generators joined the price-taking party during the cold snap. Does wind cost more on a cloudy winters day?

    This market is a dog’s dinner and the antithesis of both a well functioning market and the provision of a ‘public utility’ ( I wonder if Freydenburg is old enough to know the term). Major reform and ongoing scrutiny is the only answer. The entire energy industry and the federal government need to pow-wow.

    There’s no shortage of customers ( or wind, sun or gas), plenty of black ink, where’s the management and planning teams? Where is the transition plan? Who is gaming it?

    And one more question…. ” who runs this …… show?”. No more comments from me, asking polite questions to politicians seems more constructive. Anyway, why type on Reneweconomy instead of learning from the articles.

    PS: Moon landing anniversary the other day, I was 8yo, watching on a 12″ tv. I marvelled, it was such a buzz! The things we can do when we apply ourselves, awesome.

    • Tom

      Wind didn’t put up their bid price, they kept it close to zero. Price is set by the marginal supplier, in this case gas.

  • iampeter

    This is another article that seems to be laying the blame for the price surges in SA at the feet of fossil fuel businesses. It’s not a secret or a conspiracy that fossil fuel businesses are closing shop in SA. How can closing shop be equated with “cashing in”?

    Having the regulators step in and take action twill only reduce the availability of energy even more in the long run and cause even more serious price spikes.

    • Peter F

      If supply is restricted price goes up. Sometimes as in last week a supplier can make much more money by supplying say 400GW at $200 ( or $8,000)/MW.hr than 600GW at $100.

      So by withdrawing perfectly functional technology from the market and restricting supply it is possible for a major supplier to “profiteer”. This is not always the case sometimes if a supplier withdraws 25% of its supply in an oversupplied market it just loses money. The problem with the current market design is that it creates too many losers and a few big winners. Even then a winner in a few weeks might be a loser over the year so almost everyone is unhappy

      The incentives and possibly the infrastructure need to be redrawn to support the most efficient suppliers. It is not as simple as more regulation will reduce supply. if different regulation incentivised the operation of CC gas turbines the cost (not necessarily the price) of generating power will fall.

  • Cooma Doug

    The solution is in the last 2 parragraphs.

    • Don McMillan

      Solving a problem via regulation is never a solution. Regulation stifles business and makes it very difficult for small players to operate. Over the last decade regulation and outright banning has destroyed or maimed all the small natural gas producers and now only the big players are left.

      A healthy market has many players big and small where efficiency is rewarded.

      Now we are left with just a few big players who do not have to be efficient as they can argue they are “To big to fail”.

      • DogzOwn

        Isn’t it corner stone of corporate organisation in Australia that competition is essential? In many cases, isn’t competition fulfilled by having just 2 of everything, supermarkets, breweries, airlines, steel etc? And here we have 3! Does the expression “cartel” still have any meaning? Engie(re-named Gdf-SUEZ), owners of Hazelwood and others, pay next to zero$ for coal, so incentive to cut Pelican Point, for hugely more profitable supply by inter-connector. Expect to see more.

        • Don McMillan

          Yep isn’t interesting we end up with 2 of every industry. Then completion laws prevent takeovers – ending up with “artificial” completion. Post WW2 migration there were many Rags to riches stories now we hear of none. Regulation prevents start-ups.

  • Ben Courtice

    The apparent manipulations of the price by large gentailers, as suggested in this article, were a large part of the reason why even other neoliberal, free-market governments like the UK abandoned Australia’s price-pool style electricity market fairly soon after trying it. No such luck, here. Setting up a “market” in a natural monopoly like electricity provision
    is problematic even when judged by standard free-market economic theory.

  • Les Johnston

    The analysis of the details suggests that market imperfections enable profiteering. Until the regulators ensure perfect market conditions, profit maximising optortunism will drive the energy market. Maybe it is time for a new market regime to be introduced as the current market has failed again.

  • balls up

    The author has no understanding of natural market forces.
    If you go to a supermarket and buy a Mars bar you can pay about $1, but if you grab one from the mini bar in a hotel room you might pay $4.
    Outrageous, but that’s what happens.
    A gas operator has every right to charge whatever he wants when he knows his only opportunity to turn a profit is to sell his services to fill the gaps in demand.
    This is made all the more obvious when he knows that the wind WILL stop and the demand WILL rise.
    Trying to blame gas operators for a problem caused by a product such as WInd Generated Power entering a market which demands a constant and uninterrupted supply of a commodity is the most ludicrous concept that can be conceived, next to the flat earth, that is.

  • balls up

    Battery storage!! Seriously, have they done any research AT ALL!
    Battery storage is a ridiculous pipe-dream.
    1300
    tonnes of lithium ion in a transfer holding pool the size of the MCG
    will hold enough power to run 12,000 homes for 7 minutes and it will
    need to be replaced every 7-12 years.
    The only way we know of
    storing energy for use on demand is to pump water up hill when we have
    excess power, to we can release it into a hydro system when we need ii.
    This and molten salt heat storage. Both have other complicating issues,
    but we are fooling ourselves if we think we just call on the Energizer
    bunny!