Australian energy markets have echoes of Enron crisis in California | RenewEconomy

Australian energy markets have echoes of Enron crisis in California

Recent price surges in Australian wholesale markets have strong resemblance to the bidding patterns used by Enron in the lead up to California’s energy crisis more than a decade ago.


Just how bad a situation are Australian energy markets in? We are told, repeatedly, by the architects, managers and regulators of Australia’s National Electricity Market that it is the most efficient in the world.

But lingering questions about the state and fairness of the market are being brought to the fore – by soaring gas prices, the controversy over high electricity prices in South Australia, and as the country grapples with the pace of the extraordinary energy transition that looms over the incumbents.

Authorities are still not sure whether to see this as a massive burden or an incredible opportunity, and there is no great expectation that this week’s meeting of state and federal ministers will provide more than a collection of bandaid and interim measures, rather than paving the way to the widespread reform that is clearly needed.

That’s because energy policy, rather absurdly, remains a partisan issue. Ideological blocks against climate science are reflected in the lack of any environmental outcome in the goals of the NEM, and a prejudice against new technology.

Even more disturbing is the power of the incumbent industry, which has been so successful in controlling the regulatory and policy framework that what should be a relatively cheap energy system is one of the world’s most expensive. The utilities are laughing all the way to the bank, and the mainstream media is looking the other way.

Australia, as fossil fuel proponents are keen to note, has more than enough sources of cheap energy, primarily coal. But by the time it gets to the consumer, its cost has multiplied ten-fold, courtesy of the massive margins taken at the generation, network and retail level.

Analysis of recent trading in South Australia has highlighted the similarities between what is occurring in Australia and what happened in California in the early 2000s, when market manipulation attributed to Enron and bankruptcies brought that state’s economy to a halt through a series of massive blackouts.

There is no suggestion that such blackouts will occur in Australia – apart from those (mostly incumbent generators) campaigning against more renewable energy in the system – nor that there is necessarily anything illegal occurring in the energy markets.

But what we are seeing, according to the Melbourne Energy Institute, is the almost unfettered use of market power and some trends in bidding practices that resemble closely the events that led to the dramatic energy shortages in California more than a decade ago.

Three things stand out, says MEI’s Dylan McConnell: the “economic” withdrawal of certain generators, a big rise in the disparities between the costs of generation and the prices asked, and a change in bidding patterns that takes advantage of constraints in network.

Investigation by the US Federal Energy Regulation Commission into Enron and the Californian power crisis found that high prices were more due to economic withholding by a pivotal generator than to market fundamentals. McConnell suggests similar forces are at play in South Australia and the rest of the NEM.

First on the margins, which we reported on last week, and which David Leitch documented more than a week earlier. These are also known as “spark spreads” – the difference between the cost and the normal price gained on the market from generators.

gas margins south australiaBefore June 2016, the South Australian spark spread averaged $17.34, comparable to other markets such as the UK. But since June, after the closure of the Northern coal generator, with gas prices soaring and gas supply issues, and constraints on the electricity network, the spark spread is estimated to have increased by between $40/MWh (at AGL Energy’s Torrens Island gas generator) and $60/MWh (Origin Energy’s Quarantine generator).

During this period, McConnell noted, the volume of sales also increased. He said such behaviour contrasts with typical price volume trade-offs expected in efficient markets.

The other issues cited by FERC in its investigation of the Enron trading strategies were described as “gaming” and “anomalous market behaviour”.

‘Gaming’, FERC said, is taking unfair advantage of the rules and procedures … to the detriment of the efficiency of, and consumers in … the markets. ‘Gaming’ may also include taking undue advantage of other conditions that may affect the availability of transmission and generation capacity.

‘Anomalous market behaviour’, FERC said, is behavior that departs significantly from the normal behavior in competitive markets that do not require continuing regulation or as behavior leading to unusual or unexplained market outcomes.

It cited evidence for such behaviour as withholding of generation capacity under circumstances in which it would normally be offered in a competitive market; unexplained or unusual re-declarations of availability by generators; unusual trades or transactions; and pricing and bidding patterns that are inconsistent with prevailing supply and demand conditions, e.g., prices and bids that appear consistently excessive for, or otherwise inconsistent with, such conditions; and unusual activity or circumstances relating to imports from or exports to other markets or exchanges.

MEI has documented instances of nearly all these in South Australia’s high-price events in early July, and many have already been substantiated by investigations by the Australian Energy Regulator in its market assessments, although its report into the highest priced events are still to be completed.

torrens island offer curveMEI points specifically to instances of ‘gaming’ and ‘anomalous market behaviour’ – pointing the finger at Snowy Hydro’s Angaston Power Station which it says physically withheld generation. It also looks at evidence that Torrens Island economically withheld generation capacity, and in its rebidding behaviour, including one instance where an extra 140MW of capacity was withheld to the highest price band.

The issue here is not that the practices are necessarily illegal, even though the South Australian energy minister has threatened to take the issue to competition authorities for further investigation.

The primary issue is the lack of competition, and the ability of a few players to dominate the market – a situation that the Australian economy witnesses in so many sectors. Some of that lack of competition is the result of decisions taken by the Coalition government a decade ago when they chose to privatise the assets.

They sold the network, but kiboshed a proposal to add competition by building a new inter-connector. They also sold the Torrens A and Torrens B gas plants as one, rather than two different generators as had been recommended. They got a higher price by doing so, but consumers are now paying the cost.

South Australia is seen as the proverbial “canary in the goldmine” as far as the energy transition in Australia goes. The main lobby group had been hoping for an “armageddon” that could result in its reinforcing the position of incumbent regulator by strengthening the rules and policies that favour those incumbents.

The hope is, however, that the opposite occurs, and the energy ministers look at what has been happening in energy markets – including the king’s ransom demand for energy security by a handful of generators in the same market – and push the regulators to act with more haste, and more bite.

A host of different rule changes are currently under consideration that could increase competition, mostly by removing the stranglehold enjoyed by the very gas-fired generators accused of market “gaming”, and opening up the market to new technologies, particularly battery storage.

California, which has a much higher renewable energy target than Australia, is already going down that path. Australia should also be at the forefront of the shift to an “energy democracy”, given its extraordinary solar resources and the high take-up of the technology by consumers.

In fact, there is possibly no other industrial sector where consumers have such opportunity to challenge the power of the incumbents. Rooftop solar, battery storage and smart software is giving consumers the potential to go off-grid, to share energy, to trade electricity, to create micro-grids, and to build community-owned generators and retailers.

The potential for that change is underlined in the MEI report. It says the options to address the South Australia situation range from boosting the amount of gas-fired power, as favoured by the incumbents, to encouraging storage options such as batteries and solar towers, and to encourage more interconnection.

In the longer term, South Australian experience points to the need to diversify low emissions generation and storage portfolios.

“As we necessarily decarbonise the national electricity system and increase renewable energy penetration, technologies such as storage and solar thermal will become increasingly necessary to provide for both peak capacity and reliability of supply,” it says.

baseload south australiaOne thing it won’t need, is more “base-load” generation. As RenewEconomy pointed out last week, there is no room for additional baseload in the state, just for more “flexible” capacity such as storage. The MEI reinforces that, and says that the baseload need in South Australia is for “minus” 210MW.

But many of these options – apart from cutting the line altogether – are difficult to obtain because the rules are stacked against new competitors. The coincidence of a range of factors has contributed to a rapid and unprecedented rise in the concentration of market power.

And until the federal government has a vision and a policy that provides certainty beyond 2020, then that energy transition is not likely to happen as easily and effectively as it should.

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  1. Cooma Doug 4 years ago

    Im thinking 10 out of 10 for this article

    • Neo Lib Yes 4 years ago

      I am thinking paranoid delusional rankings from Giles. Enron is known as a classic example of wilful corporate fraud and corruption, that is clearly not the case in the Australian Energy Markets.

      • MikeH 4 years ago

        I am thinking “neo lib yes” is the most accurate part of your contribution.

        From the regulator’s 2015 State of the Electricity Market report.

        “Queensland’s generation sector is more highly concentrated than other mainland NEM regions, with Stanwell and CS Energy controlling 64 per cent of capacity. From November 2014 generators (including Stanwell, CS Energy and Callide) used rebidding strategies to shift large volumes of capacity from low to very high prices late in a trading interval. In tight market conditions, an unexpected shift in supply can cause prices to spike. By rebidding late, other participants lack sufficient time to respond, preserving a high 30 minute average spot price”

        Sound familiar? But there is more

        “Ernst & Young estimated the late rebidding added around $8 per MWh to Queensland price caps in the December quarter 2014, and around $7 per MWh in the March quarter 2015. Across the market,
        this increase represented a cost of around $170 million.”

        An extra $170 million by “legally” exploiting their monopoly position in the market to shaft Qld consumers.

        • Neo Lib Yes 4 years ago

          No what I am contributing is calling Giles out on his ridiculous headline. There is no wilful corporate fraud and corruption, just regulators who appear to be a bit on the slow side and corporations operating to market regulations. The headline should probably say Energy Regulators Giving Away Money: Apply Here.

  2. Stuart Jones 4 years ago

    A very good article which points to the reasons for inertia and the changes needed to allow for better electricity markets in Australia.

  3. Brunel 4 years ago

    Who Americanized the dates?

  4. Paul Turnbull 4 years ago

    Short term profits are weakening the case for corporations to deliver electricity. Who’d have thought that anything to could make Government enterprises look so appealing. So much is wasted in gaming the system, seeking to out compete – at risk to so much that communities and industries value.

  5. Jean Morreau 4 years ago

    Nice to know there are even more reasons to go solar, but I think you mean “canary in a coal mine”

    • Carl Raymond S 4 years ago

      Maybe not. From the perspective of those with sufficient power to manipulate the market, it probably is a gold mine.

  6. Daniel 4 years ago

    The South Australian 16 cent Feed-In-Tarrif ends on the 30th Sept 2016 and if all those households add storage, I wonder if that will substantially reduce the spikes in peak demand?

  7. Daniel 4 years ago

    We had notice of a Planned Power Outage today from 9am – 3pm with Essential Energy in NSW. Installed a $7600 hybrid solar system and was wondering how it would perform completely off-grid. I made sure the 9.6kWh lead acid battery bank was fully charged. We have a 2500W inverter/charger which normally tops up its peak power from the grid. We supposed there would be enough power for fridges and computers and one kitchen appliance like a kettle, hotplate or toaster if used consecutively. I was going to test this theory though Essential Energy cancelled the power outage. Six hours is quite a long power outage. I’m wondering how the rest of our area feels being notified of a power outage and having it cancelled immediately before it was scheduled to begin. There’s another power outage between 9am – 3pm for a weeks time away.

    • Phil 4 years ago

      Daniel , try 3 days out in Qld !

      Floods , cyclones , tornadoes and it takes 2-3 days to get the grid repaired.

      It can be so bad the grid takes 3 weeks to repair and they bring in mobile gensets to feed suburbs while they repair major feeders damaged

      One wonders with global warming and more severe events how much those costs will push up network pricing as 1 in 100 year events become 1 in 10 year events

      • Daniel 4 years ago

        I’m in a fairly coastal rural country town of 20k people in NSW. I imagine grid reliability gets progressively worse the more rural and remote families are residing. Sounds like your in north Queensland with additional challenges as well. For safety reasons, I imagine people in fringe of grid locations also need backup gensets for water pumping and fire fighting. Then there’s having a solar system at least big enough for backing up critical systems like fridges, computers and their communications. Whereas city folk are often concerned about shuffling power back and forward with a smart grid, reliability is perhaps more of concern for rural areas.

        • Phil 4 years ago

          Was Brisbane Metro !

  8. Analitik 4 years ago

    The “gaming” is only possible due to the reduction in competition by the closure of the Northern and Playford power stations. Now that the remaining generators are assured of business, they don’t need to bid in normal rates and time blocks (they place an offline bid) but can wait for the emergency calls when a shortfall is pending and rebid at what the market will bear.

    Of course they could all just bid the maximum rate at all times to be upfront about it. The results would be the same.

    Given the above, the time would seem ripe for large scale storage to be deployed if it could be funded.

    • Daniel 4 years ago

      Once installed, there’s little grounds to think large scale solar will be billed fairly. It has to get to the location it’s needed. Therefore energy harvest at its point of use is the most ideal paradigm in terms of families being able to determine the final price of electricity delivery.

    • Jonathan Prendergast 4 years ago

      Interestingly the business case for large scale storage would also rely on energy price volatility and high price events. They may also be incentivised to game the system.

  9. Phil 4 years ago

    I’ve adopted the attitude that unless there is an obvious majority showing outrage , and people are voting for a system like this , then that is what they (the majority) want (and deserve)

    The people have voted , and must be satisfied through their obvious inaction or lack of outrage.

    There is no reason for the majority of those who do not agree with this to simply go off grid or take other actions including offsets and reducing demand.I did all 3 of those and could replicate the same business model just about anywhere

    For the ones that claim they cant , there are many other options , which would take a whole book to cover. But in Australia those options are there now if you look hard enough and are prepared to work at it.

    One thing for certain the promised holy grail of reduced energy charges by government , industry , the experts , even with no carbon tax , has not eventuated anywhere i can see. In fact electricity prices rose on average 10% in many parts of Australia this past year , even with a historically low inflation rate of around 2%

    I guess the majority will just have to work that little harder on that treadmill to pay for it.

    • Daniel 4 years ago

      Yes for those of us with technical ability or some money, waiting for new utility level technology would seem futile and frustrating. No one would make their family rely upon a shitty service unless they had no choice.

    • Mike Dill 4 years ago

      I agree that in this instance leaving the grid will be a sensible option, but right now, doing everything you can to reduce your grid load is the best option. Soon storage will be cheap enough to have a week of electricity on-hand. but we are not there yet.

      • Phil 4 years ago

        Yes Mike i 100% agree with that

        It is very important to reduce loadings over time so when batteries are more affordable you dont need as many up front and the replacement cost (cost of ownership) is less too. And your inverter load is reduced allowing either more appliances on at the same time or a smaller inverter with less losses as well.

        I found by over time by replacing old appliances and lighting as they wear out with energy efficient ones my load dropped by 70%.

        But this step requires a plan. So many who live day to day wont do it. So any loading reduction they achieve is often by a chance purchase rather than a planned one

        I just replaced my 10 year old high end 24 inch ccfl backlit Computer screen with an LED one of the same brand and the power consumption is now 20 watts versus 120 watts . And the new one is far superior and brighter. As that device is on 16 hours a day that’s 1.6 kw saved with just one appliance change

        • Mike Dill 4 years ago

          I upgraded my old monitor to a 45 inch TV. Not much energy savings but really big 🙂

  10. Les Johnston 4 years ago

    As it is not illegal for a private company to maximise its profits, the AER has to fall in line. Time to change the market rules and introduce competition.

  11. Dennis Abbott.. 4 years ago

    Jello Biafra sums up the Californian Crunch quite well,
    “The rolling revenue review” on spoken word album,
    Machine Gun in the hands of a clown.

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