Regulator’s report points to outrageous gaming of South Australia energy market

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Regulator’s report into July 9 event in South Australia points to outrageous gaming of the energy market in that state. Customers are getting screwed, but it’s not the fault of wind or solar.

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The Australian Energy Regulator has confirmed the outrageous gaming of wholesale electricity prices in South Australia in early July, when the big generation companies jacked up their prices when the main link between the state’s grid and Victoria was heavily restricted by maintenance work.

A report from the AER was released late Friday, and confirms RenewEconomy’s contemporaneous observations that the market was being gamed  by the generators on July 9, resulting in a six-hour period where prices averaged more than $600/MWh, a three hour period when prices averaged more than $1,200/MWh and one period where the price was more than $8,800/MWh.

As the AER notes, these prices had absolutely nothing to do with the cost of generation, or the lack of supply, or peak demand. It occurred because the market players sensed an opportunity to fill their pockets, and struck – as they have done on so many occasions over the past decade and more.

And for all their talk about clamping down on the activities of the big generation companies, it was the federal government’s wholly owned company, Snowy Hydro, that was in the thick of the bidding strategies along with the others that dominate the small grid.

The chief tactic of these market players, notes the AER – and as we highlighted at the time – was to take advantage of Australia’s 30-minute settlement rules, which do not align for the dispatch period, which is every 5 minutes.

This presents an irresistible opportunity for the generators to take advantages of network restrictions, or other constraints, to bid very high prices for one 5-minute period, so guaranteeing a high price for the entire 30 minute settlements period (where the price for the 5-minute periods are averaged out).

Having set a ludicrously high price in one five minute period, the generators then bid low – and often to the price floor of minus $1,000/MWh – to ensure that their generators share in the spoils.

This created an extraordinary scene on July 9 where the price repeatedly lurched from more than $10,000/MWh to minus $1,000/MWh over successive 30-minute periods as the gaming – which is not illegal, and is admired by the ACCC chair Rod Sims as the “market at work” – went ahead in full view.

  1. “Participants waited until high 5-minute (dispatch) prices had occurred early in a trading interval and in response shifted their offers to supply electricity from high to low prices, seeking to increase their output during the high priced trading interval,” the AER notes in its report.
  2. “They did this because they hoped to increase their supply of electricity during the remainder of the trading interval to increase their earnings.”

The AER notes that every half-hour period from 10.30am to 2pm, the price was bid up to more than $10,000/MWh for one five-minute period (usually early in the 30-minute period) so the generators could ensure their pockets would be filled.

As we pointed out at the time, this had nothing to do with a shortage or power. The maintenance work was flagged a week ahead, so there was no surprise. As well, demand was not high and there was more than 1,000MW of excess and unused capacity.

But as AER notes,  nearly half of these so called “cheap” fossil fuels were priced at the absurd level of more than $5,000/MWh on some occasions during that day..

It’s like going to the farmers’ market and asking for a dozen eggs. Half of them are priced at 50c each, but the other six are $50 each – but you can only buy a dozen – so that will be $303 please. The generators pocketed an extra $20 million that day from South Australia alone.

The AER didn’t say it (in fact, the tone of the report seems at some points to be admiring of the generators’ restraint), but I will: It’s a bloody outrage.

It is exactly the sort of behaviour that big energy users such as Queensland zinc refiner Sun Metals – way back in 2015 – sought to stamp out by requesting a change to 5-minute settlement periods.

Despite the support of other big energy users, the Australian Energy Market Operator, and numerous independent analyses pointing to the continued gaming, the market rule-maker, the Australian Energy Markets Commission, took several years to assess the request, and then delayed implementation until 2021.

The big energy generators fought furiously against the shift, including and particularly the federal government-owned generator Snowy Hydro, because the change is likely to favour fast-response technologies such as battery storage and demand response.

The generators’ lobby group, the Australian Energy Council, also fought against AER’s investigations into such high prices events. As a result, and quite absurdly, the AER is not even allowed to interview individual traders involved in the bidding, having access only to bidding data – much of which is clear to see on the day itself.

The AEMC has argued the delay in the 5-minute rule was justified by its complexity. Yet it was the driving force behind the even more complex re-write of the National Electricity Rules to accommodate the emissions and reliability obligations of the proposed National Energy Guarantee.

The NEG was due to take effect from July next year – rushed through even though the rules had not actually been finalised, reviewed, tested and assessed. But it was presumed to favour the incumbents. In the end, it was canned by the political fighting in the conservative ranks.

The big energy users have helped propagate the nonsense that much of the cause of high wholesale prices in the Australian grid is the fault of renewables, when most observers point to the gaming.

Look what happened when the Queensland government instructed its state-owned generators to pull their heads in – prices fell significantly. Given the Coalition government’s enthusiasm for market intervention – threatening to take away assets such as Liddell that companies threaten to close – one wonders why they don’t tell Snowy Hydro to bid low.

The generators and their lobby group like to plead that the behaviour witnessed on July 9 in South Australia doesn’t happen, and it’s true that Murdoch media readers would not be any the wiser.

But if this report isn’t enough proof – following on from the repeated gaming of the FCAS market that was finally destroyed by the Tesla big battery at Hornsdale – a new report on “strategic bidding” from the University of tasmania and McGill University confirms it.

“We show that a dominant firm can gain substantially by manipulating its bids, and take advantage of the opportunity to submit rebids,” the authors write.

“In the Australian National Energy Market (NEM) where settlement prices are an average of six dispatch prices, it can, for example, withhold capacity at lower prices for the first bid in a period, creating a price hike, and then add capacity at lower prices to ensure dispatch.

“Using data from the Australian NEM we provide the first empirical evidence consistent with the hypothesized theoretical behaviour in the observed data.”

The authors wonder, at various points, if this bidding behaviour should be described as the activities of  “one-shot oligopolists” or “heterogeneous oligopolists” – with the difference being whether they are acting independently or collusively. (Hint: There’s plenty of opportunity for the latter).

But consumers shouldn’t care much – just know that they are getting screwed, and it’s got nothing to do with wind or solar.

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