Gas role in SA price spikes underlines clear case for battery storage

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$1 million per megawatt hour? That’s the cost imposed on the market when a gas generator slightly increased its output for 15 minutes during a recent high price event in South Australia. It’s hard to imagine a better case for battery storage.

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A clear case for new rules that encourage the uptake of battery storage is underlined by a new report from the Australian Energy Regulator that highlights the actions of gas-fired generators during recent high price events in South Australia.

The AER report on the event on July 13 show the dominant gas generator in the state – Torrens Island B – charging $14,000/MWh for adding a mere 18MW of additional capacity when wind output fell and demand jumped soon after 6am.

Those bids added $5.1 million to the cost of wholesale electricity for that 15 minute period. In that time, Torrens provided an extra 4.5MWh of output. That translates to more than $1 million in total costs to the market for each extra megawatt hour of gas fired electricity. One couldn’t think of a clearer case for an alternative to the current market system – and battery storage is an obvious answer.

The AER report focuses on the unexpected fall in wind output, which is picked up other media reports, but this is surprising because it is not so much the changes in demand and supply that influence outcomes, it is how the generators respond.

This was clearly demonstrated when prices soared to take advantage of scheduled hot water load in September, and in bidding practices where generators bid “high” for one 5-minute dispatch period, knowing that the price would then cascade through the whole of the 30 minute settlement.

This usually results in hitherto “unavailable” capacity suddenly becoming “available” in the hope of being able to cash in on the high prices. As a new report from the Australian Energy Market Commission reveals, this is a regular practice. (See more below).

News reports such as the ABC’s chose to focus on the role of wind energy – although there is a question about whether the wind capacity actually fell as much as the AER claims in that 30 minute period. It appears some of that reduction actually occurred in a previous 30 minute period.

But as the AER points out in a report in yet another high priced event the following day, July 14, wind is not the only variable: The Pelican Point gas plant, which had been commissioned by the South Australia government to generate electricity when the interconnector was shut down for repairs, experienced “starting problems” and could only supply one quarter (60MW) of the 240MW of capacity that it had promised to the market a few hours earlier.

The actual price jump occurred at the 6.20 trading interval on June 13, when demand jumped by 23 MW and semi-scheduled wind generation decreased by 17 MW. And because a bunch of diesel generators would take too long to switch on, and would have to run for nearly an hour to justify their leap into action, the market operator appeared to have no choice but to call for 18MW of capacity from Torrens Island B at the asking price of $14,000/MWh. This set the price for the remainder of the period, meaning the price jumped to more than $7,000 for the entire half hour.

There were a couple of other factors that were crimping supply on that day. Works on transmission hardware needed for the interconnector upgrade meant that 180MW of wind generation on the other side of the works was actually being exported into Victoria at the time. With that capacity, one imagines there would be no way that the gas generators would have been able to ramp up the price so dramatically.

It should also be noted that while some 680MW of gas capacity had been sidelined – for planned outages – but there was another 1,000MW of gas and diesel available – but only at prices of more than $12,500/MWh, the AER reports. So it was not as though the 18MW provided by the Torrens B station was the last available.

Indeed, Torrens B, later that day, delivered significantly more capacity, and experienced significantly sharper ramp rates, than it did in the 6.30 trading interval – and it charged significantly lower prices at those times. (Graph below courtesy of Melbourne Energy Institute).

TORRB copyWe should note that Torrens and its owners AGL Energy are not doing anything illegal. Under the current rules, they are free to exploit the market – and indeed are encouraged to do so by the Australian Competition and Consumer Commission.

The question is – why is the market able to be so easily exploited by the gas generators – and should the rules be changed. The overwhelming conclusion seems to be yes.

Major consumers are pushing for a rule change that would require financial settlement in every 5 minute bidding period, rather than the 30 minute. They even have the support of AEMO and the AER, who admit that the 30 minute settlement rule distorts trading and prices.

And it is important to point out that this is not an issue about renewables, or the variability of wind and solar, it is a question of market power.

Queensland relies almost entirely on coal and gas, but its market is also controlled by a handful of generators, and it too has been victim of market power plays that have added hundreds of millions of dollars to the pool price.

In an interim report circulated by the AEMC into the proposed rule change, it documented the bidding practices in Queensland over a 3-year period, linking bids to certain 5 minute intervals over the 30 minute settlement period. The results are astounding.

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Even the AEMC was taken aback. “The sharp, volatile nature of the dispatch prices is surprising, particularly when we recognise that this chart is not for a single day, but for 3 years’ worth of observations (i.e. each point on the light blue line is the average of 1095 data points),” it wrote.

“It is therefore unlikely that the volatility in dispatch prices is a result of ‘random noise’ – something structural in either supply or demand is influencing the outcome.”

And that, we would suggest, is the exercise of market power. Indeed, it says in the same chapter: “This result appears to support the concerns of Sun Metals, and others in the market, that the skewing of incentives caused by 30-minute settlement has a material effect on price outcomes.”

Sun Metals is the aluminium producer which proposed the rule change, and which – for obvious reasons – is being supported by independent analysts, and providers of battery storage and smart software who believe they can wrestle the market power from the gas and diesel generators.

The owners of the latter technologies, needless to say, are fighting this tooth and nail, threatening to withdraw their capacity, but it seems that the AEMC is warming to the argument for a  rule change.

This is important for South Australia. Its energy minister Tom Koutsantonis, is looking to double down on gas for  short term fix, but unless the state moves to diversify its energy sources, then it will simply bang into the same issues.

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