How gas generators cashed in and exploited hot water load

It’s a sign of lazy journalism and it is rampant. Almost all mainstream media – Fairfax, the ABC and of course the Murdoch empire – routinely blame South Australia’s high electricity prices on renewable energy. They hardly ever question the role of the gas generators. They should.

South Australia has long had the highest electricity prices in Australia – even before its investment in wind and solar – because it is at the end of the grid and it has always had a heavy reliance on gas generation, and “peaky” usage.

The sort of price spikes witnessed on July 7 used to be commonplace before the arrival of wind and solar, which makes it deeply ironic that the July price surge was blamed on renewables, or the lack of them.

But events since then provide another illustration on how gas generators are able to exploit the market, and are clearly events when the blame cannot be shifted on renewables.

According to the Australian Energy Regulator, a price spike to $14,000/MWh occurred just after 11.35pm on Monday, September 5, when demand jumped 212MW as the grid operator switched on all the electric hot water systems under its controlled load operations.

This demand is not a secret nor a surprise. It happens every night. Powering hot water systems was shifted to the late evening time slot years ago because the coal fired generators and other “baseload” generators did not want to be switched off, but there was nothing much else for them to power while everyone slept.

On September 5, the market was cruising along normally. Then a funny thing happened. There was slightly less wind capacity coming through than thought four hours earlier, but instead of pushing up prices by a little bit, or maybe even doubling them, the price surged from $33/MWh to $14,000MWh.

Apparently, that was because “low priced” gas generation was “not available”, although this table above suggests there was plenty of available capacity. And guess what happened when the price jumped to $14,000/MWh?

Suddenly, within five minutes all the “unavailable” gas generation suddenly became “available”, because the operators knew they were guaranteed a minimum $2,300/MWh for switching on in that 30 minute period.

In the rush to grab that money, there was a stampede of offers from generators that had been “unavailable” just 5 minutes earlier and the price fell immediately to $44/MWh.

A similar event occurred three days later when the price jumped from $60/MWh to $14,000/MWh, again in that second five minute time slot, before falling to negative territory as the gas generators fought for an allocation knowing they were guaranteed a windfall if they could win a slot.

Of course, this sort of caper carries on most days. The Melbourne Energy Institute recently produced a report showing the number of times capacity was “unavailable” at the start of a 30 minute period, and then suddenly became available 5 minutes later after the price had surged in one 30 minute interval.

A variation of this bidding strategy occurred in the July 7 surge blamed on renewable energy, or the lack of it. Gas capacity was “unavailable” at the start of the 30 minute session at prices less than $14,000. And once that price was established, they all rushed in for their share of the spoils.

This didn’t happen just once but repeatedly through the day, as if on a continuous loop. Everyone rushes in, but then suddenly capacity is scarce again! Repeat. And somehow the blame for the state’s high costs goes to renewables.

The Australian Competition and Consumer Commission reckons this is fair play, just a market operating as it should. Its boss Rod Sims, says the gas generators have every right to exploit the market in this way.

But the Australian Energy Market Operator and the Australian Energy Regulator concede that this practice distorts the price, and that is why they are supporting a rule change proposed by big energy users, such as aluminium smelter Sun , who are sick of getting screwed by the gas generators.

This rule change is simple. Instead of having financial settlement every 30 minutes, which allows one 5 minute bidding rush to raise the prices for the whole period, it proposes to have the settlement every 5 minutes.

This, the proponents say, and the regulator and market operator agree, will reduce the cost, and encourage new market entrants such as battery storage, which can respond in milli-seconds, much quicker than the 40-year-old gas generators that currently dominate the market.

Of course, the gas generators, owned by AGL, Origin Energy, Engie and others, are furious anyone is suggesting such a thing. They say it will increase costs and is too hard (AEMO says that is rubbish), and will force the exit of gas generators – revealing once again their penchant for holding the market to ransom.

The AEMC was on the verge of knocking the rule change on the head, as it has done to most progressive rule change suggestions in recent years. But under pressure, it has decided to look at it in more detail, and a decision will be made around the middle of next year. It couldn’t come soon enough for Australian energy consumers.

The point of this story is to point out, yet again, that the market rules and practices in Australia are designed to favour the incumbents, who have exploited their market power to such an extent that it is all but impossible for consumers to access electricity in Australia at less than $300/MWh, in many cases less than $400/MWh

That is more than 10 times the price of our “cheap coal”, but the generators, networks and retailers, with a mixture of over-investment, super high margins and market manipulation, have been allowed to screw the consumer, and pass the blame elsewhere. It shocks me that the mainstream media lets this by. Maybe it’s the party pies in the corporate boxes.

P.S. Why on earth has the South Australian network operator not already moved the big lump of hot water load from 11.30pm and scattered the load through the day, particularly to fill in the “solar sponge” created by all that solar PV on the rooftops of homes and businesses and being exported back to the grid.

As this graph shows, the hot water loads are a constant and could easily be spread through the evening. The second graph shows the changes in demand. It seems outrageous that the gas generators should be allowed to exploit this, to varying degrees, day in and day out.

The Queensland network operator has already shifted some solar hot water to the middle of the day to act as a “solar sponge.” SAPN has said it was considering doing the same, but presumably has not yet acted because it is “hard”, and requires some smart software to do it properly. Yet another argument for having a “smart grid” rather than the dumb, gold-plated monolith we currently have to deal with.