Energy crisis: Price cap on electricity market for first time ever in Queensland

The Australian Energy Market Operator has taken the unusual decision to impose a $300/MWh price cap on the Queensland electricity market, after cumulative prices over the past week averaged more than $674/MWh and exceeded a trigger point for the intervention.

The intervention by AEMO on the price settings is big news, because according to WattClarity it is the first time it has happened in the state, although it has happened in recent years in South Australia and earlier in Tasmania.

The price cap was due to expire at 0400 AEST on Monday, but AEMO announced it would be extended for another 24 hours because the trigger point of $1.359 million in accumulated costs remained breached. It’s likely to remain in place for another week.

But the price cap had another, almost immediate consequence. It caused many generators to suddenly withdraw capacity because they did not think they could make money under the price cap.

That forced AEMO to declaring a “lack of reserve 2” situation, which meant there was effectively insufficient back up if a major generation unit was to trip.

On Monday morning, it updated this to an LOR3 event, warning that up to 513MW of load may have to be shed from 1730AEST because of the lack of supply. It then tripled this to nearly 1.5GW, before halving it again to around 800MW.

It then announced another intervention event to call on emergency reserves under its RERT mechanism, which could include some demand management options, in an effort to avoid forced outages.

See: AEMO warns of load shedding in Queensland supply crunch, as prices capped

At the time, three out of four units at the Callide coal generator were offline, two out of six at Gladstone, and one out of two at Milmerran. This accounts for around one quarter of the state’s coal fleet, which is now clearly neither cheap nor reliable.

But the reason for the Lor3 was not a lack of supply. It was the deliberate withdrawal of capacity, effectively a “gaming” on the compensation regime. Generators were more likely to get paid what they wanted if directed to generate in an LOR3 situation rather than the price cap.

The wholesale market in the main grid has both price caps at the top of the market ($15,600/MWh) and the bottom (minus $1,000MWh), but there are also cumulative price caps – nearly raised to $1.359 million over a seven day period in an individual state.

The price cap in the Queensland market was imposed at 6.55pm on Sunday evening after prices had averaged more than $10,000MWh for more than one hour, thanks to its dependence on a dwindling supply of coal capacity and sky-high gas prices.

But NSW is also in danger of breaching the price cap, with the cumulative total last Friday reaching more than  $1.1 million. It is the second most dependent state on coal (after Queensland), although it has a clear plan to switch over to renewables in the next decade.

Queensland has suffered the most in the price surge of the last two months precisely because it is the state grid most dependent on coal and gas. Just 17.8 per cent of its fuel mix in the past 30 days has come from renewables.

This is despite the state having a 50 per cent renewables target by 2030, more than 30 large scale solar farms, the most rooftop solar, and is building the country’s biggest wind farm (MacIntyre), and the biggest solar farm (Western Downs).

The only relief for the Queensland market in the last seven days has been the role of solar, which in sunny weather has helped push wholesale prices down to zero, or even into negative territory.

However, once the sun goes down, the state’s lack of significant amounts of wind power and storage means that the fossil fuel plants take control of the market, and with the costs of coal and gas sky high as a result of international events, the price often surges into the thousands of dollars, way above the cost of generation.

This pricing power is now likely to be the subject of investigation from various regulators, including the ACCC. the irony, though, is that most generators in Queensland are owned by the state government.

Those generators had been accused of “rorting” the market, one of the main reasons why one of the biggest energy consumers in the state – the Sun Metals zinc refinery in north Queensland – pushed for the introduction of 5-minute settlements, rather than the 30 minute settlement subject to wild abuse.

Queensland even implemented its own pricing controls of a sort in 2017 when the state ordered the state-owned generators – principally CS Energy and Stanwell – to moderate their bidding behaviour. It had an immediate impact and Queensland prices fell to the lowest in the country.

That instruction was removed in 2019, but the state government has refused to do a repeat of that order in the current energy crisis.

This is despite the state having by far the most expensive wholesale electricity price in the country over the past week, this month ($548/MWh), the last month ($347/MWh), for every calendar month since last August, and for the year to date ($174/MWh).

Queensland has only two large wind farms, the 456MW Coopers gap and the 180MW Mt Emerald, although it is also building three new wind facilities – MacIntyre (1.026GW), Dulacca (180MW), and Kaban (157MW).

It also has only a single large scale battery (Wandoan), although others are about to be built, including at Bouldercombe and near the Kogan Creek coal fired generator (pictured above).

The state is also searching for more pumped hydro capacity, and is promising to release a new energy plan later this year outlining how it is going to get to its 50 per cent renewables target by 2030.