Charge, Discharge, Dominate: Batteries are emerging as tool of choice for exercising market power

An analysis of ‘Significant Rebidding’ in the NEM reveals how BESS assets are increasingly being used to influence prices and exert market power — by both incumbents and renewable-focused new entrants.

The use and abuse of market power is a topic that gets industry insiders, market observers and informed consumers riled up. 

It has become topical again recently as the dynamics of how market power is exercised in the NEM is changing as the grid transitions and more flexible battery energy storage systems enter the market.  Exercising market power in the NEM is legal. provided it is done without any form of collusion, but public policy generally aims to minimise the extent of this practice.

Before exploring the changes and public policy implications, I’ll give some context.  The exercise of market power, for the purposes of this article, refers to generators strategically operating their assets and shaping their bids (and rebids) to inflate the market clearing price well above the short run marginal cost of the marginal generator. 

This practice is normally only possible during periods when demand is close to maximum supply (resulting in reduced marginal competition) either across the NEM or in a region isolated by weak or congested interconnections.

The scarcity rents achieved through this practice are an incentive for additional generating capacity to enter the market, but this can take years.  And meanwhile it hurts consumers who bear the cost of these increasingly common high-priced events, immediately if they are large users exposed to the wholesale price of electricity, or with a short delay as hedging costs and retail rates rise in response to rising average wholesale prices.  

Gentailers with large fossil fuel generation fleets have traditionally dominated the exercise of market power using strategies like ‘pricing up’ and ‘economic withholding’. 

On the face of it, battery energy storage systems’ ability to time shift cheap renewable energy from periods of abundance to periods of scarcity holds out the promise of suppressing price volatility and a reduction in the instances where market power can be exercised.  In practice, battery owners, both new entrants and incumbents, are increasingly using the same market power playbook along with some new tactics of their own to maximise revenue.  

The Australian Energy Regulator (AER) is responsible for monitoring the use of market power.  They are obligated (under the National Electricity Rules) to publicly report on all intervals where the wholesale price rises above $5,000/MWh, or 500 c/kWh in retail-friendly units. 

This is a price level well above the short run marginal cost of all generators and hence a good indicator of the exercise of market power.  The AER does this by producing quarterly reports which include all the ‘significant rebids’ which contributed to each high-priced 5-minute interval.  While there are true operational reasons for rebids, generators with many ‘significant rebids’ are almost certainly engaged in the exercise of market power.

The chart below shows an analysis of the 2023 & 2024 high priced intervals aggregated by significant rebids of each technology type.  Battery energy storage system assets were involved in nearly as many high-priced intervals in the second half of 2024 as any other technology, despite there being only ~2.4 GW of BESS capacity – less than 3% of the NEM total.  

Committed projects will see BESS capacity grow beyond 10 GW over the next 2-3 years.  However, this new capacity will remain concentrated among a limited number of market participants.  It thus seems likely that batteries will come to dominate ‘significant rebidding’.

Note also that variable renewables seldom are involved in making significant rebids, and generally they have very low generation during the periods when scarcity rents are earned – even though the BESS assets often charge up on them earlier in the day.  Our market is providing a strong investment signal for additional battery storage, but not for the additional bulk generation that is also required for the transition.

How can BESS be getting so influential despite the relatively small capacity?  Firstly, the batteries that are exercising market power the most are in South Australia – our frontline on the renewable transition with limited dispatchable generation. 

South Australia is also, at times, weakly interconnected to the rest of the grid which makes the exercise of market power much easier.  But the more significant underlying reason is the speed with which a battery can respond – shifting from idling to discharging at full capacity in a few hundred milliseconds.  

This flexibility allows for frequent late rebidding – and traditional generating assets just can’t ramp fast enough to respond.  Batteries can also physically withdraw capacity from the market – by emptying fast in anticipation of a tight period. 

This earns more than traditional economic withholding, helps push out competing generation during discharge and, with good timing, can help cause a price spike after the battery is flat.  You might think this sounds counter-productive because the battery is out of the market when the price is highest – but the asset owner typically has other generation like gas or wind still in, which all benefit from the elevated pricing.

Both Gentailers and large renewable operators alike are using BESS assets to exercise market power, as can be seen in the chart below.  It shows high priced intervals in the second half of 2024 influenced by significant rebidding by owner, with BESS contribution highlighted in purple.  

So, what actions can be taken now to prevent us moving from one oligarchical market to another as the grid transitions and becomes ever more reliant on the wave of new batteries?  I offer three public policy recommendations relating to current live issues in the industry for your consideration:

Alter the criteria for state and federal BESS support schemes to place a higher emphasis on ownership diversity and projects that include additional bulk renewable generation

Have the AER deny ring fence waiver requests for DNSP owned neighbourhood-scale batteries that are intended to be operated by the Gentailers*

And finally, have consumer advocacy groups encourage consumers to only make their home batteries available for orchestration by entities without conflicting interests

* or better yet, as I will argue in a forthcoming article, get the DNSPs to fairly compensate consumer energy resource exports during periods of peak demand for the distribution value they create and avoid building DNSP owned ‘community’ batteries entirely

Thanks to Prof Iain MacGill and the Dr Fade analysis group for suggesting the review, opinions and any omissions are mine alone.

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