Did big batteries break the fossil fuel cartel on the grid, or did they just join it?

The Australian Energy Regulator has released its latest summary of high priced events in the wholesale electricity market, and it contains the usual story – fossil fuel generators using their market power to extract super profits that will inevitably be paid by an unsuspecting public.

The scenario is grimly familiar: A tight supply situation exacerbated by high demand or, more likely, a coal outage or network constraint of some sort, compounded by the shocking bad luck that makes low cost capacity suddenly disappear from the market and push prices towards the market cap.

The reasons cited by the generator owners are varied – the failure of some unit to start, “technical” issues at another, “accidentally removing capacity” at one hapless gas plant, or the need to “rebid” elsewhere. All entirely plausible, but when on repeat sound a little bit like the child who says the dog ate their homework.

These explanations have been served up by the operators of peaking gas plants, diesel generators, ageing coal units and even hydro power stations for years. Prices for the whole market in any trading period are set by the highest bidder, even when just a few megawatts more are needed in a grid producing more than 10,000 MW.

They never reflect the actual costs of generation, just the market opportunity. They are what former ACCC boss Rod Sims lamented as the legacy of “market power”, not necessarily illegal but arguably morally bankrupt, and just what markets do.

The latest summaries, which describe various events where the price went above $5,000/MWh in South Australia, NSW and Queensland in the past six months, shows some good news – the number of such events has fallen significantly from a year earlier when the fossil fuel industry effectively threw away its social licence in the chase for money.

The AER report highlights the ongoing issues for the market. In one incident in Queensland, nearly two gigawatts of “base-load” coal was out of action due to various outages, and trips at Kogan Creek and Milmerran took out another 1.1GW, taking the total to more than 3GW. The peaking gas generators did their usual thing and pushed prices to the market cap.

But the report, particularly relative to events in South Australia, where there is no coal and not much “base-load” or intermediate gas, includes an unexpected new actor, battery storage.

The two battery storage facilities cited by the AER for multiple re-bids in these high priced events are Infigen Energy’s Lake Bonney battery and Neoen’s Hornsdale Power Reserve. The reason cited by both is “change in forecast state of charge.”

One incident cited in detail by the AER relates to the price spikes on a cold morning on May 4, when South Australia was unable to import much power from Victoria to cover for its low wind and solar output because of various network constraints – which left its market in the hands of a small group of players, with little competition.

AGL shifted a whole bunch of capacity from its Barker Inlet peaking gas plant from below $200 per MWh to the then market cap of $15,500 per MWh, and set the 5-minute price 6 times. The AER said the rebids were a “commercial response to changes in forecast demand and price.”

Engie rebid capacity from its Dry Creek diesel generator from $5,000 per MWh to $13,126 per MWh, to “manage a constraint affecting the Heywood interconnector.”

But it also cites the Lake Bonney battery, which made several rebids from 6.12 am, from below $1,000 per MWh to above $9,500 per MWh, due to “change in forecast state of charge.” The AER noted the battery also withdrew 24 MW from below $1,000 per MWh for the 7.50 am interval.

Over at Hornsdale, in several rebids from 6.46 am, Neoen rebid a total of 30 MW of capacity at Hornsdale Power Reserve from below $5,000 per MWh to $9,000 per MWh and withdrew a total of 66 MW from below $5,000 per MWh, due to a change in forecast state of charge. The battery set the 5-minute price 5 times, the regulator says.

What’s going on? Should we be surprised?

When Hornsdale first joined the market, its owners made much of its ability to smash the local gas cartel, particularly in the frequency services market, where the fossil generators on occasion needed to only reprice a single MW of capacity to extract maximum profits from the market.

Hornsdale’s owners said at the time that the battery had saved the state some $50 million in its first year – a knight in shining lithium armour riding to the rescue of electricity consumers oppressed for years, nay decades, by the sinister actions of the fossil fuel warlords.

Now, the battery storage industry is very much part of the system, playing an increasingly essential role in filling the gaps created by the exits, and failures, of the ageing coal industry.

It might even be starting to feel a little bit incumbent, and that potentially puts battery storage in much the same trading position, and mindset, as the fossil fuel (and hydro) peaking generators.

Huge amounts of battery storage projects are now being built and commissioned around the grid. Some will be owned by new players, adding much needed competition to a market that is dominated by a rich oligopoly, or – in the case of the “firming market”, by a single player, the federal government owned Snowy Hydro.

(And it is interesting to note the rarity of Snowy Hydro’s involvement in the latest high priced events. Did someone important have a quiet word to the CEO about bidding in such events, at least while tunnelling machine Florence is stuck in the mud at the ill-fated Snowy 2.0 project?)

Much of this new battery storage capacity will be owned, or at least operated or contracted, to the very same players that have dominated the market for the last few decades. Should we expect a change of behaviour?

Probably not. The battery industry will argue, with some justification, that battery storage is cheaper, cleaner, smarter, faster and more flexible than either gas peaks and hydro, and it’s fair to assume that in general it will help bring prices down, although they do need volatility to make money out of arbitrage.

It’s what happens in those peak demand situations that will be the telling factor about how they are used in a portfolio of assets.

And in some of Lift in market price cap to encourage batteries and gas to fill coal gapthose cases, it might just get worse.

The market rule maker, for instance, has recently flagged an increase in the market cap to more than $22,800/MWh, a move it says is essential to provide the incentive for peaking gas generators to stay in the market, or even get built, and for battery storage owners to reserve some of their capacity for these rare events.

The argument being that if the battery, or part of it, is to stand in reserve for such emergencies, then it should be properly incentivised and compensated.

Which tells us that it’s likely that nothing much will change even as one set of technologies is marched out the door and another invited to take its place.

For all the talk about consumers being the centre of focus of retailers, regulators and generators, when the market circumstances present themselves, there’s only group that counts, the shareholder.

It’s the market at work.