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.