AEMC sees no market gaming, but says batteries will lower prices

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Energy rule-maker says market gaming “not an issue”, but says Tesla and other batteries will be able to use re-bidding practice to lower prices, rather than inflate them, and are already doing so.

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It’s one of the biggest jokes in the energy industry – the deliberate manipulation of capacity, availability and bidding strategies that ensures that the big fossil fuel generators maximise their profits, at the expense of consumers.

Consider it to be one of the privileges of the incumbent fossil fuel industry. They have done little to conceal it: their profits rose three-fold in the last year, representing a surge in market prices but little change in their cost of generation.

Is this just the market at work, as the regulators like to tell us, or outrageous profiteering?

The classic case in point is in South Australia, a market with little competition before the arrival of the Tesla big battery, where the incumbents had been expert at contriving high prices whenever they could.

The most obvious example was when the market operator called for 35MW of frequency and ancillary controlled services (FCAS). There is more than 400MW of this capacity in the state, from at least three different providers.

But by a remarkable coincidence, they could often only muster 34MW of low-priced FCAS – say around $20/MW between them. The last single megawatt of capacity would invariably cost $14,000/MW. And they would all share in the spoils, which amounted to around $6 million a day on the occasions the capacity was summoned.

The rorting in the FCAS market continued until the arrival of the Tesla big battery, which immediately punctured that particular cartel, and whose presence has now convinced AEMO that the special call for FCAS is no longer needed.

This is just one small example. The practice is seen as rife throughout the National Electricity Market. Report after report – from the Melbourne Energy Institute, to EY and others – have suggested this is a market that has been heavily rorted. Even the Queensland government was so embarrassed by the actions of its own generators that it told them to stop.

And when the Grattan Institute issued its own report on the level of the gaming in the wholesale markets last year, the federal government – which seems to share its view – called on the Australian Energy Market Commission, which sets the rules of this business, to investigate.

What did the AEMC find? Well, not much.

“Is gaming a problem in NEM?” the AEMC asks itself in a media release accompanying the report.

“No.”

Are they kidding? Apparently not. But we need to understand what is going on here. This is really a game of semantics – if they, or the ACCC, or the Australian Energy Regulator, were to admit that gaming was rife, which is against the rules of the market, then they would need to be seen to be doing, or have done, something about it.

And they haven’t. The “bidding in good faith” rules introduced in 2016 are toothless, and as the AER noted in a recent assessment of unusual price spikes, it isn’t even allowed to interview traders to find out what’s going on. And the AEMC is reluctant to admit that the rules it designed may be deficient.

So what does the AEMC acknowledge? It admits that “re-bidding” – the practice of changing bids, often at the last moment – is an issue,  particularly in markets where there is not enough competition. The problem is, that lack of competition equates to just about the whole of the NEM.

“To the limited extent that bidding and rebidding behaviour in the market are seen to be a problem, the analysis shows that they are driven by high levels of market concentration,” the AEMC says. “These issues related to industry structure should be addressed by policies that lower barriers to entry and promote efficient new investment.”

Adrian Merrick, a former senior executive at EnergyAustralia, and now head of the community-based retailer Energy Locals, which is competing against the big incumbents, says he is surprised by the conclusions.

“So, the AEMC found that rebidding is a problem when there’s a lack of competition between generators. Meanwhile, the ACCC report found that there’s too much concentration in the generation market.

“We can therefore infer that rebidding is, in fact, a problem? It prevents the operation of a truly competitive market and ultimately hurts customers. We have observed examples of this happening in the market and numerous other reports have been published. It’s therefore a little perplexing that the AEMC has reached such a conclusion.”

There is some good news. As we noted before, the Tesla big battery has punctured some of the more outrageous and visible rorting in the markets, and the AEMC expects this and other batteries will take advantage of the rebidding rules, and force prices down, particularly as the market finally transitions to a 5-minute settlement period which favours fast-acting technologies.

“The operation of the battery has significantly increased the incidence of late rebidding in South Australia since it began trading in December 2017 (see Figure 4.4 below), and is widely credited with reducing Frequency control ancillary service (FCAS) prices in that jurisdiction,” the AEMC notes.

“The battery uses custom software to constantly review and respond to actual or forecast changes in the market, without manual intervention. As such, rebidding is not a sign of gaming, but rather the continuous revaluation of the energy stored against the regularly updated price forecasts in the market for future trading intervals.”

What it certainly suggests is the value of more competition – and that will likely only happen with the introduction of more batteries and more “firmed” renewables into the grid.

“With more flexible and fast response technologies in the future, such as batteries, there will be an increasing number of new participants and in particular, participants with the ability to respond rapidly to changing prices,” the AEMC notes. “This is likely to increase rebidding and late rebidding across the market, moderating high and volatile wholesale prices.”

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