“No regard” to market outcomes: Regulator savages generator behaviour

Coal mining at an open pit clive palmer waratah coal galilee basin-3 - optimised

The Australian Energy Regulator (AER) has launched a withering critique of the bidding behaviour of many coal and gas generators in the midst of this year’s energy “crisis”, saying some of them they acted with “no regard” to market outcomes.

Its report into market performance over the last two years highlights the concentration of market power and the deliberate actions of some generators to withhold capacity to try and force prices higher, and to oblige the market operator to issue directions.

“Several generators appear to have had little to no regard about the effect of their actions on the broader system,” it says of its investigation into the market suspension in late June.

This will be of no surprise to many participants and analysts of Australia’s electricity markets.

As RenewEconomy wrote at the time, the legacy generators threw away their social licence with their actions that deliberately forced the market operator into unprecedented intervention and intentionally sent prices through the roof.

We argued at the time that even though generators may be playing within the rules, or acting in a way that was hard to prosecute, it was appalling behaviour given the fundamental role of the electricity supply in the economy.

For all their talk about being “consumer focused” – the big energy companies couldn’t give a stuff about the lights going out or not, they just wanted to retain their ability to drain the consumer pockets when they saw fit.

See:  The day the fossil fuel industry lost all perspective, and threw away its social licence

Of course, the gas and the coal industry are at it again – threatening to pull investment and warning the “lights might go out” because the government is proposing price caps that may limit the fossil fuel industry’s entitlement to super profits.

It is beyond belief, and beyond shame, even in this greedy world. Pushing up prices for the sake of more clean energy might be one thing (actually, the impact is the reverse), but to maximise profits from dirty and polluting power stations that don’t take responsibility for their environmental impacts is quite another.

The AER report says it has not yet found any evidence of illegal actions, but it seems to suggest that’s only because the regulatory regime is so weak and because of poor market design.

The regulator does make the point that large-scale solar and wind generation have helped bring competition to the market at certain times of the day, and brought down prices from where they would otherwise be.

But when wind and solar are not producing enough to increase competition and lower prices, the thermal generator flex their muscle, and it notes that the control of prices remains entirely dominated by these thermal generators – coal and gas – along with hydro.

“Ownership of dispatchable generation remains concentrated during peak periods, leaving the market potentially susceptible to the exercise of market power of individual generators,” it says.

“While we have not identified any widespread or systemic patterns, our analysis has revealed there may be some evidence suggestive of sustained exercise of market power through offering capacity higher than cost with the intention to increase prices, otherwise known as economic withholding.

“Our results require further analysis to test the potential drivers of the behaviours we have observed and to assess the significance on market outcomes.”

AER chair Clare Savage writes in a media release accompanying the report that while the observed conduct is not necessarily illegal, it may indicate that competition in the market is ineffective at times.

“The exercise of market power, and subsequent upward pressure on price, is not on its own a breach of the National Electricity Rules but it could point to issues in both market design and the effectiveness of competition,” she said.

Savage makes a series of recommendations, the most important of which might be a lift in its own monitoring powers – which are highly restricted – and for greater visibility of contracts, to better assess the competitiveness of wholesale markets, and better understand ongoing market liquidity.

The earlier investigation revealed generator behaviour that resulted in poor market outcomes.

“Some generators, in withdrawing capacity from the market, engaged in conduct that significantly contributed to the circumstances causing AEMO to issue a direction. Several generators appear to have had little to no regard about the effect of their actions on the broader system.”

The regulator says some generators may have had a reasonable cause to withdraw capacity given they were facing limited fuel availability and wanted to conserve fuel for peak periods or preserve fuel stocks.

Another cause – fearing having to supply at a loss – is less clear given the existence of a compensation regime designed to encourage supply during times of system stress.

“Currently, the Rules do not oblige generators to offer available capacity and they can decide not to do so for commercial reasons. However, the prioritisation of commercial freedom can be detrimental to power system security, particularly under times of system stress.”

 

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