Regulators’ wake up call: Fossil fuel majors are gaming markets

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Regulators issue grim warning about power of big fossil fuel generators to game energy markets, forcing up prices. They say the price surge to “unprecedented” highs in coal-dependent Queensland is being driven by market concentration and the lack of large-scale wind and solar.

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Australian regulators are finally waking up to the grim consequences of Australia’s archaic energy market design, and the fallout from the reckless and self-serving opposition to carbon pricing and renewable energy targets by the industry incumbents.

The Australian Energy Regulator’s latest State of the Energy Market report paints a frightening picture of how prices are controlled, manipulated and thrust into orbit by the cynical bidding practices of the major fossil fuel generators.

Consumers – both households and business – are paying the price, and they are faced with a double whammy, because as the Queensland Competition Regulator notes in its latest pricing report, it is the lack of renewable energy in the state which is allowing the coal and gas generators to set high prices.

This last bit of information is highly ironic, because the QCA, under the then leadership of Malcolm Roberts (not the Senator, but the current head of the main oil and gas lobby APPEA) was among those who used to rail against solar feed in tariffs and the like.

The then Queensland energy minister Mark McArdle argued that renewable energy would cause energy prices to surge. In fact, as anyone who was paying attention would have predicted, the opposite has turned out to be true.

So much so that the QCA now makes clear that it is the lack of renewable energy that is allowing wholesale prices to stay high. That’s because it means the market relies more on expensive gas to set the marginal price, but also allows the fossil fuel generators virtual carte blanche to manipulate the market.

This might be finally addressed by the current surge in large-scale solar plants and wind farms in the state’s north and south-west.

Certainly, some are waking up to it. Telstra is the latest, signing a contract to build a 70MW solar farm, while Sun Metals is building its own 116MW solar farm near Townsville.

Their motives, as they were for the Sunshine Coast council which is building its own 15MW solar farm, are to free themselves of the tyranny of the small cabal of coal and gas generators, that sets the wholesale price of electricity in the state.

NEM generation market share

The market power of major fossil fuel generators and their bidding practices have been highlighted in the AER’s State of the Energy Market report released this week, and is yet more confirmation about the poor design of market rules which leaves the regulator powerless to act.

The report acknowledges that the problem stems largely from the decision to allow generators and retailers to form so-called “gentailers”.

This has helped those big companies protect their own revenues through hedging, but also create an oligopoly that the AER says has posed a “potential barrier to entry” to new generators and retailers.

AGL Energy, Origin Energy and EnergyAustralia, it notes, supply 70 per cent of retail electricity customers in the NEM and have expanded their market share in generation capacity from 15 per cent in 2009 to 48 per cent in 2017. In some states, control of generation lies in the hands of just two or three major players.

This market dominance has reached such levels that it is the bidding practices of the generators – rather than the ratio of renewables or even soaring gas prices – that is having the major impact on prices that consumers pay.

“High levels of market concentration and vertical integration between generators and retailers lead to market structures that may provide opportunities for the exercise of market power,” the AER says.

This is especially the case in South Australia, where the AER says the major contributing factors are the region’s “relatively concentrated generator ownership, generator bidding behaviour, thermal plant withdrawals, and limited import capability.”

queensland price spikes

And it is occurring in Queensland too, another state where the market is dominated by just a few, government-owned generators, and where prices have jumped to “unprecedented” levels of around $108/MWh in the first nine months of the 2016/17 financial year.

“Opportunistic bidding by large generators has caused periods of spot market volatility in Queensland for several years, typically during summer,” the AER report says.

“For example, generators periodically rebid large volumes of capacity from low to very high prices late in a trading interval, typically on days of high energy demand and when import capability on transmission interconnectors was constrained.

“By rebidding late in a trading interval, other generators lacked time to respond by ramping up their output. Given the settlement price is the average of the six dispatch prices forming a trading interval, a price spike in just one dispatch interval can ow through to very high 30 minute settlement prices.”

This effective rorting of the market has been highlighted repeatedly by various studies, including by the Melbourne Energy Institute.

It is the reason why Sun Metals led the push to a 5-minute settlement period – a proposal backed by the Australian Energy Market Operator and others as a means to stop this practice, but which has been fiercely rejected by all the major fossil fuel generators.

The AER report goes on in some detail to show how generators in Queensland rebid capacity into high bands on days hot weather and strong demand, and particularly when their were constraints on imports from interstate.

This, as we have noted, does not just happen in Queensland and South Australia, but happens more often because of the fact there is limited lines interstate.

This manipulation of the market – which has now riled the network operators as well – is further illustrated by examples the AER cites of generators deliberately withdrawing capacity when prices rise.

As might be expected for a rational business in a competitive market, large generators do tend to produce more output as prices rise—at least to around $100 per MWh. But, in each region in the years to 2015-16, generators sometimes reduced their output when prices rose above $100 per MWh.

“This behaviour may be explained by deliberate capacity withholding to tighten supply and thus influence prices.”

It says other possible explanations include the inability of some generation plant to respond quickly to sudden price movements, or the fact that they sometimes fail in the hot weather.

It is all, apparently, quite legal, which shouldn’t be surprising given that the fossil fuel industry has been allowed to pretty much write the rules of the energy market to fit its own business model and revenue objectives.

But it does underline the case for a change in rules that can encourage a more diversified, more competition and more technologies – such as battery storage and demand control.

As AEMO, ARENA, CEFC and many others have emphasised, this market needs a radical overhaul, and it should not be left in the hands of the current rule-maker, the Australian Energy Market Commission, to do this.

The “unstoppable” transition to a renewable-focused, decentralised grid is likely to face some hurdles.

As former US defence secretary Donald Rumsfeld used to say, there are “unknown unknowns”, such as the fault ride-through settings on wind farms in the September black-out, and with gas generators and coal generators before that.

There are also known unknowns, such as the amount of inertia and synchronous energy that will be required in a grid powered mostly by wind and solar.

But the deliberate manipulation of market prices by fossil fuel generators is a known known. It is time for Australia’s policy makers to do something about it, and stop blaming wind and solar for price rises that are solely the responsibility of fossil fuel costs and generator actions.
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15 Comments
  1. Ray Miller 1 year ago

    The gaming of the wholesale price by generators has been known for close to two decades! Yet nothing has been done about it by the incumbent regulators, either a new broom should be swept though all the current organisations (like appointing more of likes of AEMO’s new CEO) or they be shut down and we call do a major restructure without any input from the current players.
    I also would like to see a supper profits tax be levied on each settlement period above the long term average and a sliding scale, the higher the amount the greater the tax with all proceeds going into energy efficiency with the express purpose of reducing future peaks in demand and price. Energy efficiency priorities, it seems is well down everyone’s list and not taken as seriously as the benefits would dictate.

    • john 1 year ago

      Just build more Renewable Energy supply and this will curtail the situation where they can bid up the price.
      At the same time it would appear that putting more RE with PPA’s into the energy mix will help mitigate the situation.
      A super profit tax will only be passed on to the end user.
      It is apparent that the shift to a 5 minute rule will come about, which may lessen the super price that is gained at times.

  2. Ren Stimpy 1 year ago

    Clicking the charts still doesn’t expand the readability of the charts.

    • Kevfromspace 1 year ago

      That’s because RenewEconomy heavily compresses every image uploaded here, to the point where most graphs are completely unreadable. Giles Can you please look in to this?

    • Alastair Leith 1 year ago

      It’s less about the compression and more to do with the pixel dimensions these screen grabs are capture at by the author/editor. They almost never link to original sources and are screen grabs. All Giles needs to do is expand the graph/diagram/image on his screen as much as possible before making a screen-capture of the image and load that image as per usual.

      The website CMS (backend) will more than likely make a smaller version for the webpage and clicking would link to the large one where you actually read the text without using Esper Photo Analysis technology from the future. 🙂

  3. MaxG 1 year ago

    Stating the obvious 🙂 The game for corporations is to game any system they face… everything that should be standard or common sense needs to be regulated or fought for; e.g. minimum wage, environment protection, consumer protection, and the list goes on.

  4. DevMac 1 year ago

    A progressive tax on any wholesale price over and above some kind of agreed average would provide extra money for government and / or a lesser incentive for price gouging by the generators themselves.

  5. juxx0r 1 year ago

    hydro tas has been doing the same thing by not building more so that they carry the same windfall as the marginal generation

    • Alastair Leith 1 year ago

      There’s isn’t an more on-river hydro to build without more environmental damage. And if it’s owned by gentailers or fossil owning generators they still wont use it just like Wivenhoe dam in brisbane that almost never gets used for pumped hydro in-spite of the obvious potential for arbitrage in that market.

      • juxx0r 1 year ago

        it need not be hydro, could be wind or solar.

  6. Hettie 1 year ago

    The register of pecuniary inteerests should show which Members of Parliament and Senators hold significant stocks in Fossil Fuel companies.
    Such holdings should automatically preclude them from voting on energy related issues.
    This, of course, will not happen until Hell freezes over.

    • Alastair Leith 1 year ago

      Unfortunately it can’t list the boards of Fossil Fuel companies which they’ll retire onto in a wealthy life after Parliament, though machine learning could probably have a decent stab at it given enough data about their decision making as ministers and voting recording cabinet and parliament.

  7. Les Johnston 1 year ago

    The National Competition Policy would appear to require renaming as the National Fossil Fuel Cartel Policy as the policy is not achieving competition. Double speak.

  8. wideEyedPupil 1 year ago

    But markets are truth, justice and democracy for an affluent society aren’t they? So much more efficient and effective that unreliable politicians and governments. Meanwhile peak bid in WA’s SWIS ‘market’ mostly under govt control was around $205/MWh in last to FYs. Though has to be said WA is retrograde in the extreme in getting utility scale renewables and medium to large scale PV BTM online over the last two terms of Barnett Government.

    • Mike Dill 1 year ago

      If it is a ‘open’ and ‘free’ market why is it not possible for me to play?
      The market is rigged.

Comments are closed.