If Turnbull was serious about energy prices, he’d bring Snowy Hydro to heel

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If Turnbull is serious about lowering energy prices, he should bring the government-owned Snowy Hydro to heel on bidding practices, as he has praised Queensland government for doing in that state.

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Prime minister Malcolm Turnbull and energy minister Josh Frydenberg love to boast about what they are doing to lower electricity prices, and have even declared their admiration for the Queensland Labor government’s decision to tell their state owned generators to moderate their bidding practices.

But if Turnbull and Frydenberg were really serious about lowering energy prices, instead of shouting at the likes of AGL for closing an increasingly decrepit and expensive coal generator like Liddell, they’d look to keep their own house in order.

That means they’d do the same as Queensland Labor, and instruct Snowy Hydro – which the federal government has owned outright at the start of this month – to do the same, and moderate its bidding.

On Monday, as RenewEconomy reported and the mainstream media ignored, wholesale electricity prices in South Australia were sent into orbit by the bidding practices of the small cabal of generators that control the market in that state.

Snowy Hydro led the way, with three of its diesel generators in the state at the heart of  a bidding strategy that saw prices pushed up to the market cap of $14,200MWh in the first five minutes of the standard 30-minute settlement period.

This guaranteed a price for that 30 minute period of at least $1,200/MWh, and sometimes twice that, and windfall gains at the expense of consumers.

But to ensure their share of this windfall, the generators then had to bid the price down to the market floor of minus $1,000/MWh in the last five-minute period  to gain market position.

They did not do this once. They did not do this twice.

They did it six times in a row, and then another three times in the following three settlement periods when they didn’t quite get to the market cap, because more solar and wind energy was being produced, but still bid to extremely high levels and far beyond the cost of production.

The party finally came to an end in the 2pm trading interval, when the fossil fuel generators had to bid to the market floor – minus $1,000MWh – for three consecutive five-minute periods, just so they could cash in on the $945/MWh price guaranteed by the artificially high price in the first five-minute period.

And all this had nothing to do with supply – because demand was low – as can be seen in the graph above – and because there was more than 1000MW of excess fossil fuel capacity in the market. Most of the gas generators stood by and watched the fun.

Of course, in South Australia, most of the idle gas generators are owned by the same mob that were doing and profiting from the bidding. Better to have half your capacity being paid more than 10 times the normal price, than all your capacity being paid a slight premium.

How did they do this? Well, as we explained on Monday, they took advantage of a “network constraint” imposed by the Australian Energy Market Operator, which effectively blocked out any imports from Victoria, and so blocked out competition.

The scene was set for a rort because there was – as predicted – little wind and solar generation at the time.

Worse, it seems likely, say observers, that this constraint was contrived by the market players themselves – with a deliberate bidding strategy in another state, to the point that it creates what is called “negative settlement” revenues.

This refers to an imbalance in the market that more or less obliges electricity to flow in the opposite direction than it should. So electricity was flowing out of South Australia when it should have been flowing in. (It’s unclear to us who was responsible for this particular bit of the bidding).

So AEMO steps in to stabilise it, and declares a network constraint – also influenced by a small outage, we are told, in South Australia. The problem is that it left the market players to party while they could, not bothered  by competition from interstate. And they did.

Such artificial playing fields are not unusual. Snowy Hydro and Origin did the same thing in November, 2016, in NSW, when their bidding created a network constraint, forced Victorian competition out of the market, and they then made hay with extremely high prices from their peaking generators in NSW.

The regulator observed this, recorded this, and just noted it was the market at work. The same thing happened repeatedly in the FCAS market in South Australia – and was observed without intervention by the regulators – before the Tesla big battery smashed that particular rort.

It likely happens – to some degree – every single day. Consumers can’t expect much protection from regulators in the cosy oligopoly and club-like atmosphere of Australia’s energy markets.

But Turnbull and Frydenberg are the ones standing on the soap-box, proposing government intervention in decisions about coal generators, pumped hydro schemes and the like, so it’s time for them to show some gumption and act rather than talk, and so something that lowers prices rather than raise them.

It would all be rather simple. They could instruct Snowy Hydro to moderate its bidding practices to ensure that it did not bid the price to the market cap as it did on Monday, an act over four or five hours that pushed up total prices for the day more than ten-fold. It was an outrageous piece of gaming.

The federal government has already said it is not worried about the dividend from Snowy, happy to have the country’s fourth biggest gen-tailer keep its profits so it can finance the Snowy 2.0 pumped hydro scheme.

And that’s exactly why Turnbull and Frydenberg are unlikely to intervene. Pulling in its bidding practices would be the end of the huge windfall gains the company makes from the market.

RenewEconomy sent emailed questions to the offices of Frydenberg, asking if he approved of the bidding strategy, and whether the federal government would take a leaf out of the Queensland government’s book if it cared so much about electricity prices.

We also asked South Australia energy minister Dan van Holst Pelekaan to see what he made of the bidding on Tuesday.

We didn’t get a response from either by the time of publication. We’ll update you if we do.

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24 Comments
  1. ben 2 months ago

    I think the term is “to heel”.

  2. David leitch 2 months ago

    This is where I have a problem with Govt ownership of a business that operates in the private market. Either the Govt is going to interfere in management or it is not. In Queensland where the Govt essentially owns most of the genreration and where it reduced competition from 3 generating companies to 2 there is arguably more of a case for Govt direction of prices.

    Snowy however is supposed to be run as its own business with independent management. For me this means letting management profiteer if they want to and they can. Equally it means hands off when and if prices go low.

    The best outcome would be if the Government didn’t own Snowy, wasn’t conflicted, and had market rules that maximised competition and minimised abuse, if there is any, of market power.

    I get that others have different opinions.

    • Cooma Doug 2 months ago

      I agree 100%. It doesnt matter what market you are in, its the traders job to maximise returns within the rules. You dont design a market and then tell the traders to go easy. You establish the rules to optimise the technology potential.
      In the Snowy situation we are talking an energy capability of 5000 gwh per year. The capacity factor is only 13%. In this market they must function as a peaking plant and would be negligent if they did not scrape the peaks.
      New load side shifting products will create a need for rule changes to enable effective market response. This is a really complicated issue. There will be mistakes. There will be products and opportunities appearing as things change. It is really difficult to understand the mix of technology and the market process. Its hard to get it all together when looking for an optimum market design.

      • MaxG 2 months ago

        As I said many time; no matter what bandaids you are applying, the root cause is the privatisation of a public good. In order to fix it, the relvant sector needs to be publicised; drive the leeches out of town. It seems to me that many do not understand the role of government in a democracy; but then, corporations are working hard to minimise government to profit even more from the public, without any social responsibility, or even more drastic supported by tax cuts provisioned by the government further impoverishing the public. — don’t you love it! 🙂

        • Joe 2 months ago

          Hi Max, I always look forward to reading your contributions. We may live in a democracy but clearly things are not right. What we need is a social democracy and here is where we need government to step up its game. All this flogging off of public assets which governments DO NOT own ( public assets are held in trust by government on behalf of the people ) is leaving us worse off. The NSW BereJOKElian Governemnt’s sale of The Land Titles Office is the latest disaster exposing the folly of the selling off of our public assets. Whenever a public asset is flagged for sale those leeches as you call them just lick their lips and rub their hands in glee.,

          • MaxG 2 months ago

            Thanks Joe… and it even worse than what you stated; see my replies to David Leitch a few posts up, in support of my argument that you cannot hope for government to change anything for the better of the people. Name one thing the current government does that is beneficial for the people. ? Only one! ? ? Yes, I thought so.

    • MaxG 2 months ago

      Like your comments, but disagree with increased competition.
      Increased competition in a capitalist system is short-lived until such time the competition has been eliminated by way of buy-outs, take-overs, or price wars and vertical integration. It is the ultimate goal of a capitalist firm to create a monopoly for it self to become the ultimate price setter. This is simply how it works and has been working for yonks.
      On a small scale, look how a Walmart or Coles kills small businesses in a community; which then leads to increased unemployment, less money to spend, until the Walmart leaves a dying town.
      As for the gov operating in a private market; this is the root cause; essential services should be run by the government. But then, neoliberalism seeks actively to reduce gov and maximise the proceeds of privatisation.

      • David leitch 2 months ago

        Max

        This reminds me of a sociology discussion. Walmart achieves an economy of scale enabling it to offer lower prices, greater convenience and a wider range. This wins customers and customers vote with their wallets.

        If Walmart subsequently attempts to monopoly price it eventually runs into competition (see Amazon) as new entrants perceive an opportunity.

        I do agree that business people strive to reduce competition through vertical and horizontal integration and other strategies. Markets are often not as fair as textbooks make them out to be. Despite their imperfections I still don’t think there is a better system for resource allocation.

        The question is whether essential services should be run by government. I don’t see that as a self evident truth at all. It assumes the government has better access to information than the combined wisdom of all market participants. Looking at electricity I do see that governments have a low cost of capital and this is a key factor in the renewable energy industry, but does the government understand demand as well as the market does?

        Sigh. We could discuss this for many hours but the soccer semi finals are coming up and I have to be in good shape to watch them properly.

        • MaxG 2 months ago

          🙂 I am well aware that tackling it all requires a book to discuss.
          I said small scale = communities; these systems were working, vibrant and diverse; unemployment unknown, everyone contributed in some way.
          I have done quite a few analysis (as part of my job) to gather information and calculate the numbers, whether it was cheaper for gov to do or run something, or whether ‘outsourcing’ (=privatisation) was cheaper. In any case the gov option was cheaper (some times by miles). No word is invoked more frequently or more fervently by apostles of privatisation than efficiency. Yet this is a strange basis on which the neoliberals built their case, given the fact that public services are often more efficient than private ones. The issue I have is that neoliberalism has the idea that everything should be run as a business – that market metaphors, metrics, and practices should permeate all fields of human life. Yet, a profit-driven system doesn’t mean we get more for our money – it means someone gets to make more money off of us.

        • solarguy 2 months ago

          Go England!

          • Joe 2 months ago

            Hello my solarman. Here’s my tip…they’re ( England ) gunna go home after losing the 3rd place playoff !!

          • solarguy 2 months ago

            I hope you are wrong Joe.

            Come on England……..come on England.

          • Joe 2 months ago

            Well your mob progressed further than my mob….Die Mannschaft. My second pick, Belgium, will win the 3rd place playoff against ‘aaaaaarrrrrrrrrry Kane and the rest of your boyos.

          • solarguy 2 months ago

            Ah, das deushlander. So sorry your chaps are out old man. Won’t mention the war either.

            Are you getting up to watch us give the Croat’s a damned good thrashing? After all we’re cousins old boy, origins Saxony and all that. Lol.

            Come on England……..come on England!

            You know the song we are the champions……no time for losers……. sing it Freddy.

            Oh and the other favourite……… another one bites the dust….boom, boom, boom…and another one gone…………..

          • Joe 2 months ago

            Hi Solar, sing this one after the Croats do ’em over…(England ) They’re going home…They’re going home !

          • Joe 2 months ago

            Hello My Croatiaman…6.37am Full Times …its Croatia 2 – 1 England…..They’re going home….They’re going home! Fair play Croatia. Try again in 2022 England.

          • solarguy 2 months ago

            Lol, I knew you couldn’t wait to gloat. Yes their going back to the old dart, but with heads held high after a great tournament.

          • Joe 2 months ago

            Agreed, they played very well and on the improve as well. World Cupper 2022 could be the year…Its coming home…Its coming home!

    • MaxG 2 months ago

      Also ‘competition’ is what kills ‘collaboration’… which is the very essence of a social society; Working together not against each other. And taking this further up another notch, capitalism is by its very nature the antichrist of democracy. Capitalism aims to control it all, and we have evidence where the riches go and the resulting inequality we have today; while in contrast, democracy is about equality, something for everyone, including human rights.

      People are so blinded by the current system, they do not see how the fourth pillar of democracy vanished (the press bought by corporations), the second pillar is disappearing as corporations buy the politicians, to reduce the very government they represent; leaving the people with the short end of the stick. And despite it all, people do not see how democracy is being dismantled and fascism rears its head. — [Excursion] The fascism of the 1920s and 1930s had three core features: it celebrated will and violence over reason and law; it proposed a leader with a mystical connection to his people; and it characterised globalisation as a conspiracy rather then a set of problems. [/Excursion]
      Sounds familiar? Revived today in conditions of inequality … fascism serves oligarchs as a catalyst for transition away from public discussion and towards political fiction, away from meaningful voting and towards fake democracy, away form the rule of law and towards personalist regimes. (see Putin, Trump, and Abbott, with Europe following suit [Brexit, AfD])

  3. Joe 2 months ago

    And there he was right on cue. On the ABC Q&A program last night ( Monday 9/7 ) the topic of energy pricing was raised and on the guest panel was our Matteo Coalavan. He couldn’t resist having a go at South Australia about that huge spike in price. On one hand he said that he has nothing against Renewables (which would be the first time I’ve heard that from him ) but on the other hand he is always cutting Renewables down. Of course he didn’t explain why the price spiked on Monday…just leaving the punters with that now worn out impression that the price spikes are always because of SA’s strong Wind & Solar usage.

    • MaxG 2 months ago

      It’s called politics; you and I may call it “fallacy by omission” or “wilful ignorance”; because this is what it is.

  4. howardpatr 2 months ago

    Hypocrite Turnbull could hardly be perceived as being serious about energy prices, climate change or the renewable energy future and even if he was, his nemesis, Abbott, and his invariably RWRNJ followers won’t get over their obsession with burning coal and allow him some clear air.

    If Turnbull wanted to demonstrate he was serious when he said in 2009 that he would only lead a party as committed to climate change as him he would have established a federal body aimed at urgently evaluating, with the states, the most promising of the pumped hydro sites identified by the ANU’s Andrew Blakers.

    About the only thing Turnbull has been pro-active about is tax cuts for corporations and the already well off.

    A National Distributed Pumped Hydro Scheme could have been a meaningful legacy for him; he doesn’t have much else to offer as a legacy.

  5. Nick Kemp 2 months ago

    He will declare that “the government shouldn’t intervene in a market” but leave out the “unless it is to support coal” until after the microphones are turned off

  6. MaxG 2 months ago

    The point is: Turnbull never was serious.
    He epitomises the ‘nothing man’.

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