Hazelwood market analysis stacks up – consumers were well and truly “done over”

Our recent working paper on the exercise of market power – and the $3.5 billion windfall to coal generators – following the Hazelwood closure received a great deal of public attention.

The paper concluded that the exercise of market power by AGL at its New South Wales generators explains much higher wholesale prices and the extraordinary increases in profit by AGL (and Energy Australia and Origin Energy) after Hazelwood Power Station closed.

It is a hardly surprising that the working paper would attract interest: the topic could not be more relevant, with or without a pending federal government election.

Danny Price, a consultant at Frontier Economics, wrote a commentary of our research that was brought to my attention by a colleague who saw it on LinkedIn. Price says our paper has “many shortcomings” but alludes to two pieces of evidence that he says are “extraordinarily flawed”. Anything to this commentary?

“Extraordinary flaw” number one is our purported failure to take account of the maximum available capacity instead of the name-plate capacity of generators. True ? In short, no. We graphically presented the generators’ bid data as they provide it to AEMO. This is a matter of data presentation.

The available capacity calculations we did examined how much (undispatched) coal generation was available to produce when coal generation was at the margin, using generators’ declaration of the available capacity and their nameplate capacity.

Both showed plenty of coal capacity was available in the vast majority of settlement periods when coal was setting prices. Not even the generators argued that there was a shortage of generation capacity.

“Extraordinary flaw” number two is our purported failure to account for the fact that Hazelwood’s closure had meant that more expensive capacity had to replace it.

True? Again, no. Of course Hazelwood meant the loss of a producer with low marginal costs, but the whole point of our study is that there was plenty of other coal generation capacity to replace that production with production costs not much higher.

These slightly higher costs can not explain the more than doubling in wholesale prices that occurred. As we go on at length in the paper, coal generation costs can not explain the wholesale prices. And again, not even the generators (except AGL, at times) suggest the contrary.

Finally, Price suggests even the ACCC and AER disagreed with us. Price seldom has much good to say about either the ACCC or AER, but clearly has made an exception here. Well, actually, in its electricity inquiry the ACCC was quite clear that the outcomes following Hazelwood closure reflected the exercise of market power.

On the ABC’s 7.30 coverage of our research, Rod Sims (ACCC Chairman) suggested he would not disagree with the term “gouging” to describe the market outcomes.

And the AER? It wrote three reports following Hazelwood closure, one of which did not look at the New South Wales market at all. The other two that did, both left open the possibility of the exercise of market power.

On the 7.30 program, Paula Conboy (AER Chairman) stressed her frustration at not being able to get hold of the data from the generators so that the AER could assess the situation as it wanted to.

And what did Price say on the 7.30 program about our electricity market? Something about electricity consumers getting well and truly done over. He speaks with forked tongue.

So, to channel Dennis Healy, we are feeling as if mauled by a dead sheep. I know it is indulgent to grace tosh with a response, so to use this space for some useful purpose let me encourage you to get stuck into the subject yourself.

The issues of our research are serious and our findings damning. In 2014, the ACCC opposed AGL’s acquisition of the Macquarie Generation assets and our paper suggests the post-acquisition evidence bears out the ACCC’s concerns.

AGL (with Frontier Economics’ help) sought a review of the ACCC’s decision by the Australian Competition Tribunal, which sided with AGL. We find the ACCC was quite right and the cost to consumers has been very significant. This merits serious attention.

Our power system is transforming. As more coal generators don their cloaks and ride into the sunset we must make sure their owners do not keep making off with the family silver. Consumers should expect a market that acts in their interests and when it does not, as now, agitate for reform to see off the rent seekers and their helpers.

Bruce Mountain is director of the Victoria Energy Policy Centre at Victoria University.