Market failure: Why no one trusts fossil generators to “do the right thing”

“I expect power companies to do the right thing by their customers and the country.”

NSW energy minister Matt Kean’s appeal to the better side of the fossil fuel industry’s nature was lost in the maelstrom on Wednesday as the country’s electricity market effectively collapsed, and was then suspended.

But the fact that he had to say it at all – after the Australian Energy Market Operator decided it could no longer trust the country’s fossil fuel generators to do the right thing, and suspended the entire main grid’s spot market for the first time ever – speaks volumes on where the country finds itself now.

It’s worth repeating more of Kean’s quote, because it underlines both the illegality and the moral bankruptcy of the actions of the country’s fossil fuel industry, and those who have the privilege and responsibility of delivering an essential service to the community.

“This decision will help prevent energy companies from putting energy reliability at risk by unnecessarily withdrawing supply,” Kean said in the statement.

“This comes after the Australian Energy Regulator yesterday reminded generators of their obligations under the National Electricity Rules. I expect power companies to do the right thing by their customers and the country.”

We now know well the events of the last few days that led up to the extraordinary intervention by AEMO – runaway wholesale prices checked by an intervention to cap those prices, followed by a collective ransom note from the gas generators, withdrawing capacity until they could secure the prices they demanded.

The question for Kean is this: What makes him and others think that the fossil fuel industry will start to do the right thing now? For the past two decades or more, they have done everything but.

To find one of the root causes of this unfolding disaster, this gas and coal-led catastrophe, you need go back to the late 1990s when the fossil fuel industry pressured the Howard government into dropping environmental considerations from the new National Electricity Objective, written for the then newly created National Electricity Market, the one that is now irrevocably broken.

Some observers have written powerfully about the failure of government policy and the partisan positions of Australia’s political parties, namely the Coalition. But these people have just been the front, the political stooges acting at the behest of powerful forces lined up behind them, the fossil fuel industry and its lobbyists.

Environmental considerations had been written into the draft market rules for good reason, but then suddenly disappeared, without explanation. The effect has been to distort and cripple almost every key decision on market design, regulatory approvals, investment and prices made since then.

The backbone of the market had been ripped out, and it enabled any other change that could have improved the market to be fiercely and successfully opposed by the fossil lobby: the carbon price, the renewable energy target, rooftop solar support, energy efficiency programs, demand management scheme, changes to rules that could encourage battery storage, the switch to 5-minute settlements.

The deliberate removal of the environmental objective helped the fossil fuel industry oppose absolutely everything that could possibly have helped lead to a smarter, cleaner, more efficient and cheaper and reliable grid. All of which would mean less profits from the dirty, inefficient and now horrendously expensive and unreliable machinery that they operate.

And the industry – with well funded lobbying groups and whole teams of regulatory bully-boys (and girls) in individual companies – have been largely successful: stopping, delaying or diluting key changes, and standing in the way of widespread reform, ignoring the climate science and undermining targets.

That’s enabled them to exploit the market they helped design – it’s no secret that for years capacity has suddenly appeared and disappeared as prices were manipulated, loopholes exploited, and prices pushed up by this cartel-like behaviour. The regulators have been powerless, or unwilling, to do much about it.

The fossil fuel industry has also been skillful on the public relations front. Many of these companies have managed to con the government, their customers and the media that they really do care about environmental change and the transition. They’ve even got net zero targets! Hooray!

Mike Cannon-Brookes successfully called out the bollocks at AGL, and in the last few weeks that veneer of “sustainability” has evaporated completely as the industry as a whole – blinded by the fog of their ideological and regulatory warfare, their greed and their fears of the future – lost all perspective.

They have forgotten that they are not selling apples, or tickets to the football or to the theatre. They are providing an essential service, one that keeps people warm, in work, and alive, and the full catastrophe of their actions over the last few decades has been laid bare.

This week, the key regulatory bodies – so often accused of being captured by an industry where the rotating doors between private enterprise and key institutions are in full swing – finally lost patience with the rabble they are supposed to be supervising.

The wild prices being extracted by the fossil fuel generators in the broken market triggered an automatic price cap.

The gas generators responded with ransom notes – withdrawing their capacity, refusing to switch on their kit and keep the lights on unless they got a directions note from operator that they could then take to the cashier.

The operator (AEMO) pleaded with them to make the plant available, for the health, safety and comfort of their customers. The regulator (AER) pointed out that their actions were illegal, and risked fines in the millions of dollars – although the industry (and the regulator) know full well that enforcement is near impossible.

The rule maker (AEMC) took a different tack and appealed to their collective greed by pointing out that bigger pots of gold may lie in actually observing the rules of the market and not constantly putting the market at the risk of collapse.

But within hours, the market operator – ultimately responsible for keeping the lights on – decided that it couldn’t trust the market to do the right thing.

AEMO boss Daniel Westerman made it clear that balancing supply and demand was becoming impossible to manage, so the call had been made to suspend the market, an unprecedented move.

Westerman and his team still face a difficult task. One market notice on Thursday morning advised of a massive 3.8GW gap in NSW that needs to be plugged.

There is confusion about the scale of payments. Huge amounts of coal generation remain sidelined by breakdowns, outages, repairs, flooding, mine problems and rail issues, or what the fossil fuel lobby laughingly describes as “net zero induced technical faults”. The big three “gen-tailers” have done little to replace the capacity they have and propose to close.

We are now in new territory. Federal energy minister Chris Bowen labels it a “farce”. No one is quite sure what happens from here. The only thing we can be certain of is that the fossil lobby will use the “lights will go out” threat again as they seek more favours from the market.

But we know – we have known for a while – where the future lies, in renewables and storage. Plotting the path to that destination requires policy makers to listen to those who actually want to get there, who believe in what they are doing, who respect the common good, and can actually be trusted “to do the right thing.”