Australian energy markets have echoes of Enron crisis in California

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.

Before 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.