Fury over generator bidding: “This time they have gone too far”

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Outrage at withdrawal of capacity and bidding practices in lead up to last week’s heat-wave. Did the fossil fuel generators go too far?

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Photo by Shane Rounce on Unsplash
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Regulators will have plenty to chew on when they investigate the extraordinary price hikes and load shedding that hit consumers in Victoria and South Australia amidst heat-wave condition late last week.

Already, the ideological battle lines have been drawn. The Murdoch media has rolled out the usual suspects – Andrew Bolt, Nick Cater, Judith Sloan, Robert Gottliebsen and its own editorial writers to decry the impacts of the “global warming hoax”, and the support for investment in renewable energy.

Predictably, the federal government also used the events to advance its case for new “24/7” baseload generation. It has received proposals from Trevor St Baker for two new coal units in Victoria and seems to lock something in place in its fast-tracked “tender” for new investment in baseload power.

But it wasn’t the absence of “baseload” that was the issue, but the lack of “dispatchable” power and the still limited use of “demand management” – decried by the Murdoch commentators as “third world” and the government’s own utility as “enforced blackouts”.

There was little or no mention in any of those reports about the biggest problem that faced the Australian Energy Market Operator – the absence (as it had fore-warned) of a significant share of the state’s “firm” fossil fuel capacity.

Nearly one quarter of the state’s thermal capacity went missing. Units at Loy Yang A and two units at Yallourn had already fallen victim in previous days to maintenance needs and tube leaks, depriving the market operator of 1,800MW of capacity.

On Friday, another 270MW of thermal capacity was lost because of the continued “de-rating” of coal and gas plants in the heat. Renewables, which traditionally provide around 20 per cent of the state’s capacity, actually provided around 36 per cent at the time of the imposed “load shedding” that caused up to 60,000 homes and businesses to lose power at any one time.

There is astonishment in the industry about the timing of EnergyAustralia’s maintenance program for one of its Yallourn units, and concern about the ability of both Yallourn and Loy Yang A to provide “firm” power when needed, particularly given their owners intend to keep them operating for another 15 and 30 years respectively.

But there is also anger at the bidding practices of some of the big generators in the lead-up to the heat-wave and over much of summer, something that has been building up for the last six months following AEMO’s warnings, the spike in futures prices and  the scarcity of contracts available on the market.

On Thursday and Friday, nearly every available plant was switched on, and the price went to the market cap of $14,500/MWh and stayed there for hours.

Even a diesel generator doesn’t cost $14,500/MWh to run, but the owners like to charge that much to ensure they get what they see as their just returns. And because they can.

The predatory behaviour was highlighted – for the enth time – by a regulator report about a December price spike, noting how the federal government owner utility Snowy Hydro jacked up its bids from its three diesel generators in South Australia to the market cap, because they could. Prices soared in South Australia and Victoria.

That dose has been repeated on numerous occasions during the summer, traders say, and to such an extent that on Thursday alone the generators had extracted so much from the market at the price cap that AEMO had to impose its cumulative pricing cap to ensure that smaller retailers and some big consumers didn’t go broke.

Several forums have also pointed to the actions of Loy Yang B, now owned by Alinta, which on January 14 (the first day of serious heat in the New Year) and again on Jan 24, withdrew capacity from one of its units with no explanation –  right at the demand peak.

(See graphs above – for January 14 – and below – for January 24).

Adrian Merrick, the head of Energy Locals, a small but rapidly growing community-focused retailer, says the big generators are greedy, but may have gone too far this time.

“It’s a stuffed market, and I don’t see any end in sight if politicians don’t do anything about it,” Merrick told RenewEconomy, citing the recent ACCC report that found little that was against the rules, such as they are, but huge problems from a lack of competition.

“Supply is controlled by so few people, and millions (of consumers) are at their mercy. Honestly, I’ve not seen anything like this.

“Two years ago they (the generators) told customers that the rise in bill prices was the fault of wholesale price rises, and then later revealed how much money they made out of it.

“But this time, they may have pushed it too far. It was quite blatant. There is nothing subtle about what they are doing.”

Merrick notes that generators benefit from huge price spikes even if some of their capacity is offline. Even half the capacity on line getting more than 10 times the normal price means bigger profits.

Dylan McConnell, from the Climate and Energy College in Melbourne, pointed out that high pricing would be expected in such events, and would provide the investment signal for more dispatchable generation, which is what is needed. The administrated price – of $300/MWh – was implemented as designed when the cumulative pricing cap was reached.

There are a bunch of other questions to be asked about the events on Friday, although the answers may not be known for some time as AEMO’s report will not be complete before the end of summer, and neither will an Australian Energy Regulator’s investigation into the price movements before and during.

AEMO – apart from facing reduced capacity from the state’s biggest coal generators – was also sideswiped by much higher than expected demand. It ended up being a full gigawatt higher than what they had expected it to be earlier that morning, which may explain energy minister Lily D’Ambrosio’s unfortunate and misplaced promise of no outages.

The higher demand, and the coal and gas outages meant even with all interconnectors at full throttle, and all the emergency reserves in place, the state still fell about 200MW short of needs, forcing it to impose short-lived “load shedding”.

At the time of that load shedding, rooftop solar was supplying 900MW, and because much of this output was being consumed by the home-owners themselves, grid demand was actually significantly less than the record 10,400MW in 2009.

Victoria currently has the lowest penetration of solar of any mainland state grid, although this should change as more utility scale projects come on line and more households take up the state-based incentive to install rooftop panels.

This, with more wind capacity and an anticipated expansion of the interconnectors to South Australia and NSW, plus more demand management options, will give AEMO an extra buffer, even as the frequency of heat-wave events intensifies and puts pressure on the remaining coalers.

(Note: A spokesman for Alinta said in an emailed statement that the company’s capacity has been available and bid into the market within the market rules).

 

 

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