Snowy’s diesel generators pile in to extract maximum value from S.A market

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Anyone who has had an experience on the sea-side with a couple of chips and a flock of seagulls can imagine what happened when the diesel generators spotted an opportunity to make money in South Australia on Monday.

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Anyone who has had an experience on the sea-side with a couple of chips and a flock of seagulls can imagine what happened when the diesel generators spotted an opportunity to make money in South Australia on Monday.

Taking an advantage of network constraint imposed by the Australian Energy Market Operator, following a fault in the poles and wires in south east region of South Australia, diesel generators switched on and bid prices straight to the market cap.

And it was just like seagulls fighting over chips, as diesel generators such as Port Stanvac, Lonsdale and Angaston (all owned by the now federal government-owned Snowy Hydro), and  Snuggery (Engie) piled into the market.

Over a period of six consecutive (30 minute) settlement periods (see graph above), the diesel generators bid the price up to or close to the maximum ($14,200/MWh) in the first five minute period, and then sent the price into negative in one of the last two five minute periods.

The first five minute bid at or near the market cap guarantees a hefty premium for their output over the full 30 minute period, when prices are averaged over the six 5-minute trading periods and decided.

The last five minute periods went into negative because the diesel generators, and all the other gas plants, are fighting to be the one assigned the benefit of that price premium, so they bid the price down to the market floor.

Happily for them, the market floor is much shallower than the market cap is high. Seagulls and chips.

A couple of points should be made about this:

The network constraint meant there was little that could be imported from Victoria during this time. South Australia was effectively a captive market.

Yes, there was little wind blowing at the time, and not much rooftop solar, which gave the diesel generators their opportunity. But it should be noted that the state’s biggest gas generator, Pelican Point (Engine), continued to have one 240MW unit absent.

Indeed, there was about 1,000MW of excess capacity available, as demand was not high, so this was not about a shortfall of supply, as there was more than enough gas capacity to meet demand, but many units couldn’t or chose not to operate.

So this was about the ability of a few players to take advantage of the market when a constraint is imposed by the market operator as a result of a network fault. Perhaps they were aggrieved and wanted to make up for the low prices of previous days.

What could be done?

More battery storage could help. The state has just one big battery in full operation, the Tesla big battery, but only 30MW of its capacity can play in this arbitrage market, so its impact is quickly overwhelmed (unlike in the FCAS market, where it has brought the gas cartel to heal).

A couple of virtual power plants – such as the 250MW proposed by Tesla for low income households could also help, and reduce costs for those households in the process.

And the federal government, which now owns 100 per cent of Snowy Hydro, could also do something, such as  following the Queensland government and instruct its state-owned generators to behave.

The federal government likes to tell us how it is serious about reducing prices. So here is a perfect opportunity for it to demonstrate how genuine it is.

But Snowy probably needs the profits it makes in such events if it’s going to fund the construction of prime minister Malcolm Turnbull’s pet project, the $6 billion (and counting) Snowy 2.0 pumped hydro scheme.

Diesel plants are expensive, but don’t cost anywhere near the market cap of $14,200 – but they only operate a few hours a year, so they need to make money while they can. Consumers be dammed.

It also means that the transition to a 5 minute settlement period can’t come fast enough. Big consumers and battery storage developers argued that the 30 minute settlement period left the market exposed to exactly the sort of behaviour witnessed on Monday.

The fossil fuel generators. like Snowy Hydro, fought the change because it meant that their gas and diesel units would be denied peak pricing events like this. Snowy has also fought other price lowering initiatives such as demand management.

Unfortunately, the market rule-maker, the AEMC, says the change was so complex it would take years to introduce. It has no such qualms about the re-write of the NEM rules to accommodate the proposed National Energy Guarantee, something it expects to achieve in four weeks.

Update: The bidding patterns continued on for another four 30-minute intervals, following the same pattern – bid the prices up as high as possible in the first five minute, and down to the market floor (minus $1,000MWh) in the last interval, as the seagulls pecked each other for the scraps.

As the party looked set to fade, the price stayed at minus $1,000/MWh for three five minute intervals as the fossil fuel generators fought for the last chip.

It’s hard to imagine a more blatant example of (apparently legal) market gaming – the Australian Energy Regulator is obliged to look at it, but if current practice is any guide, will not likely file its report for a few months, or maybe even in early 2019. That’s how much they care about the consumer.

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36 Comments
  1. john 4 months ago

    This does not look exactly very good one must say.

    • Giles 4 months ago

      for whom?

  2. Rod 4 months ago

    The Feds gouging SA. I’m pretty sure it won’t read that way in the local Mudrake Liberal newsletter.
    Thanks, I was watching the spot and couldn’t work out what was going on. More gouging to come, with low wind and a cloudy day.
    https://uploads.disquscdn.com/images/5974cc961d856486e005505fb8860728a9b1184a5601cb728cdeadfbb0e75533.png

    • Joe 4 months ago

      Any words of wisdom from the Marshall or the Joshua for the punters there in SA? I mean, in the past, under the reign of ex-Premier Jay, they both couldn’t wait to pile in on Labor and Renewable Energy. Somehow it must all be different now that the Coalition side of politics is sitting in the Big Chair.

      • Rod 4 months ago

        I think Marshall is on a Junket to the UK. He went to China to watch footy a Month ago. Doesn’t take them long to get their snouts in the trough.
        If it does get mentioned I’m sure it will be “Labor’s fault”

  3. DJR96 4 months ago

    Giles, the “constraint” was imposed by AEMO due to excessive “negative interregional settlement residues”. There was no physical fault with the interconnector at all.

    https://www.aemc.gov.au/markets-reviews-advice/management-of-negative-inter-regional-settlements

    What happened was that generators in Vic and NSW in particular have constrained supply so much that they have taken some of SA generation despite it being more expensive there. Hence the “clamp” by AEMO due to a NEGRES trigger.

    SO the gaming of the market is MUCH worse than you’ve described.
    I would suggest a close scrutiny of AGL’s generation availability in both NSW and SA. It is the big beneficiary since it owns much of the gas plant in SA.

    • Paul McArdle 4 months ago

      The action on negative residues was not the first constraint active today, and not the main reason for restrictions on flows. Some more here:
      http://www.wattclarity.com.au/2018/07/monday-9th-july-sees-sustained-high-prices-in-south-australia/

      • DJR96 4 months ago

        Thanks Paul. Still a couple of points you haven’t covered yet (I appreciate you have been busy with other work today so haven’t had the time to investigate further).
        Look into why LD04 was non-conforming at 6:25 this morning. Seems like setting the stage for withdrawing supply in NSW, which in turn started sucking power from SA which enabled the price spikes in SA. Who gained? Who owns Liddell?

        Again, despite one circuit of the Heywood interconnector being out, there was always available physical capacity on the other circuit.
        The constraint was imposed by AEMO because the market was so screwed up.

    • AllanO 4 months ago

      Check AEMO’s prior market notice (#63420) – there is a week-long outage of one of the two SA 275kV lines connecting Vic to SA and the forced flows to Vic result from constraints associated with that outage.

      • DJR96 4 months ago

        Sorry, read that again! Those outages are happening until next month.
        The Heywood Interconnector was not the problem.
        The problem is that the market has been gamed to such an extent that it was not operating the way it is meant to which triggered a “clamp”, AEMO balanced supply and demand in SA such that there was no import/export to the rest of the NEM.

        • AllanO 4 months ago

          Sorry, I referenced the wrong market notice. But there is a 275kV line outage today & tomorrow and the relevant dispatch constraint is V::S_SETB_TBSE_2:

          63182
          12 JUN 2018 9:26
          GENERAL NOTICE
          Planned outage of Tungkillo – Tailem Bend 275kV line in the SA region previously scheduled for 31/05/2018 has now been scheduled to 9/07/2018
          AEMO ELECTRICITY MARKET NOTICE

          The Tungkillo – Tailem Bend 275kV line in South Australia (SA) region which was previously planned to be out of service from 1/05/2018 0830hrs to 01/06/2018 1730 hrs (refer to market notice 62629) has now been rescheduled to the outage period 09/07/2018 0830 hrs – 10/07/2018 1730hrs.

          During this outage, SA will remain connected to the rest of the NEM via the Tailem Bend – Cherry Garden 275kV line and the 132kV network.

          A credible contingency event on the Tailem Bend – Cherry Garden 275 kV line during this planned outage will sever the 275kV connections between the NEM and SA. If SA remains connected to the NEM via the 132kV network, this will pose a system security issue.

          If the above credible contingency occurs, 35 MW of raise and lower regulation FCAS will be sourced from within SA.

          If this occurs, AEMO will take all necessary steps as outlined in Section 6.1 of SO-OP-3715 Power System Security Guideline to separate the 132kV network and therefore manage an orderly separation of SA from the NEM.

          Diyoni Hoole
          AEMO Operations

          • DJR96 4 months ago

            OK, thanks for that.
            But still note that that is not complete disconnection. There is still one major line through that can carry the rated capacity, just no full back-up if that one were to fail.
            Quite frankly it’s being used as a smokescreen, a scapegoat. But there was always line capacity available today. It was not a physical constraint.

          • AllanO 4 months ago

            Yep, AEMO could have flowed that single line at its full thermal capacity into SA. But if it had tripped for any reason while doing so then it almost certainly would have immediately resulted in another black system in SA or major load shedding at the very least. There is a very big difference between physical capacity and secure capability. Constraints are put in place predominantly to maintain system security, not just reflect physical capacity.

          • DJR96 4 months ago

            I appreciate what you are saying, but that was simply not the case today.
            It wasn’t just constrained a bit, it was constrained to zero. And whilst that was the case it would have had no effect if it had been disconnected. With no wind, the gas generation was wound up and could easily manage frequency if required to do so. AEMO had multiple levers to pull to maintain the system. What they can’t manage is the gaming of the market…..

    • BushAxe 4 months ago

      Yep I’ll speculate that AGL orchestrated today’s circus as they have the market with TIPS and half the interconnector down. They’ve rebid up at the start of each settlement period and then driven prices down towards the end, forcing the peaking units to switch on & off. At one stage the had 7 out of 8 TIPS units online all running at well below 50%. Once they triggered NEGRES the interconnector clamp was automatically applied forcing the other operators to unnecessarily run peakers all day. Will note Pelican Point returned to full capacity this afternoon which helped stabilise prices (it seems to be running alot closer to it’s design capacity since the overhaul).

  4. Shilo 4 months ago

    The primary reason for the change to 5min from 30, is for RE because the swings in production over 30mins are too big at times.

  5. AllanO 4 months ago

    I’m not sure why you’re focussing so strongly on the diesels Giles. As you point out there have been hundreds of megawatts of spare online gas-fired capacity available at Torrens Island, Quarantine and Osborne throughout the event, but apparently not economic to dispatch at prices less than 5 digits (?!). It’s simply not credible that the short run costs of this spare capacity exceed that of the diesels.

    The fundamental issue is lack of competition when imports are restricted and the wind is not blowing.

    • Ben Davies 4 months ago

      I am guessing that the natural gas may not be available at the time required. It may not have been economic to run the gas power plants even at thousands of dollars per megawatt hour for only a few hours (requiring extra shift or change to rosters etc).
      The diesel was probably there in a tank ready to go at short notice and the power plant may even be able to start automatically without extra personnel.
      Just my guess based on my experience of power plants.

      • Alexander Hromas 4 months ago

        The term diesel is used loosely do describe the engines most of them are spark ignition reciprocating gas engines operating in a Carnot thermodynamic mode rather than Diesel. The main gas generators Torrens Island and Pelican Point were the ones gaming the system by withholding plant and making a killing by so doing

  6. Jon 4 months ago

    This might be a valuable lesson on how the market might work in the future. Imagine that all the gas and diesel generators are replaced with pumped hydro and batteries……would the result be any different? All these seagulls will still be fighting over a handful of chips and still looking to maximise the opportunity presented. It is these sorts of opportunities that fuel the investment in the plant in the first place. So whilst the volatility in the price is irregular and should be tidied up, the outcome of very high average price across a day when there is no wind, no solar and limited interconnector is here to stay.

  7. DJR96 4 months ago

    AEMC’s report on managing negative residues explains the practice that was at play today that caused AEMO to “clamp” the interconnector.
    It is interesting that the practice was first identified between Qld-NSW, and now adapted for use with slightly different reasons to SA-Vic with devastating effect.
    https://www.aemc.gov.au/sites/default/files/content/c651efa3-ddfc-4a5d-9f75-650fcf5010c2/Final-Report.PDF

    • Rod 4 months ago

      A bit late in the day for me to fully understand but this is some sort of balancing the books? No physical problems with the interconnector?
      You might need to knock up a precis and have Giles publish it.

    • JackD 4 months ago

      Restricting power flows through the interconnectors which ends up with far higher prices being commanded by generators within the region which has a generation-consumption imbalance seems counter intuitive to me. Why have the interconnectors in the first place, if they’re constrained when they’re needed. Seems to be not in consumers’ interests either. Whilst AEMO is acting on a policy mechanism, it is providing opportunity for price scalping. Perhaps (as I suggested the other day) the ACCC can investigate the generator practices in our markets.

      • DJR96 4 months ago

        Normally we should expect the interconnector to be used to get power from the rest of the NEM to SA when prices are high in SA.
        But what happened was that the rest of the NEM (some big generators at least) re-bidded with less capacity (I’d say in NSW in particular) so that there was no affordable (cheaper than SA) excess capacity available to go to SA. So much so that some power was flowing from SA to Vic despite it being so much more expensive in SA. That in turn created problems for AEMO trying to dispatch generation in SA.
        As you said, this late re-bidding practice is NOT in the best interests of consumers. It is not characteristic of an efficient market. And AEMO had to clamp it to reign it in.

        • AllanO 4 months ago

          Sorry but this is complete and utter nonsense. There was a transmission limitation inside SA that forced generation from the south-east of SA to flow to Victoria regardless of relative regional prices.

  8. TW 4 months ago

    You are all missing the point. The real problem is the design of the NEM which uses short term pricing and allow rebidding and rebidding. The companies do what the market rules intend and encourage – that is maximising their profits.
    Move to long term pricing and no rebidding and the whole market thing dies. The companies could get rid of thousands of employees engaged in market activities and concentrate on running their plants efficiently.
    Don’t criticise the companies for maximising their profits. That is what they are paid to do. If you want to bring down the prices, the NEM rules need to change.

    • DJR96 4 months ago

      Absolutely right.
      The market mechanisms enable this behaviour. Therefore it is broke and needs fixing. If the market was truly working properly this wouldn’t be possible.

      • Jon 4 months ago

        This is actually the market working properly. With no wind, no solar and no interconnector, we need peaking plants to pick up the slack. I they don’t get the opportunity to make a profit occasionally then eventually they disappear from the market. Pumped hydro and batteries will rely on these sorts of events for their investment business case. Without them there will be no investment……unless you want a capacity market!

    • Alexander Hromas 4 months ago

      You have missed the point and so sound like a politician. When there is a shortage of power generation we cannot fix it with financial instruments we need cheap fast response generators or energy storage systems. Diesel generators cost about 50% of wind per kW installed, have very fast start times, fast response times and have a good efficiencies. The market responded as intended high demand relative to supply up goes the price. The group gaming the market was Pelican Point who withheld a unit from the pool and scooped up big time as price went through the roof and they did not have to do a thing. This is the weakness of the NEM where this behaveiour is seen as perfectly OK

  9. IT67 4 months ago

    Looks like the ‘gaming’ is still well and truly alive on the market tonight!!

    How on earth is this allowed to happen with so much capacity waiting in the wings and getting paid for the priviledge of being in ‘reserve’?

    Is this really allowed to happen in a free but constrained market? If this was stock trading it would undoubtedly be referred to as insider trading.

    As for the now Government owned Snowy taking part in this – wow!! State level market interference and consumer abuse effectively!!!

    https://uploads.disquscdn.com/images/7aa67bedc964ab05aac821b7bb7758ad5d28967a26b7f177d68da1a6866ee0f8.jpg

    • DJR96 4 months ago

      I wouldn’t be quite so quick to point the finger at Snowy. Yes the bid price for running the diesels would have been high, but they would for the most part simply have been there to plug the gaps in supply, exactly as intended.
      It is the big gentailers with assets in multiple regions that need closer examination….. This is the abuse of market that is possible with too greater concentration in the market. If every power station was individually owned and operated there would be genuine competition and this would not have be able to happen. Time to break up the big boys?

  10. rob 4 months ago

    Bloody furious!

  11. Kate 4 months ago

    Why can’t they calculate the pricing on a rolling 30 min period calculated in 5 min (or whatever) blocks instead of a set 30 min block? If the problem is the market players co-operatively game the 30 min block period for their group benefit, then get rid of the block period.

    In what you describe above they calculate in a set 30 min time block where they bid to cap at the start of the block to raise the average, then try to outbid the others at the end to gain the leading position, creating the roller coaster.

    Why doesn’t AEMO instead simply change the 30 min calculation period from a set block period to a rolling 30 + 5 mins period, where the 5 min price is determined by the 5 mins actual supply time + 15 mins either side. Wouldn’t this be a more true, less artificial market by getting the market players to try and out-meta each other and the market by the individual rolling 5 min periods? I’m assuming there is a reason why they need to use 30 mins for calculation purposes, but having a rolling calculation instead of a block calculation I would think would eradicate, or at least greatly diminish, the problem that you’re outlining.

    • Kate 4 months ago

      You know, if this is continuing behaviour on the part of a handful of market players in particular industries (ie coal, gas) to game the market, then perhaps we should get our hands on statistics of the average price earned by individual generation types or generators in these 30 min settlement periods and compare them. If what you imply is correct – that non-renewable generators are gaming the system when renewable sources are less abundant – then that would be shown in a straight forward comparison of earnings per generation type.

      It would have the additional benefit of providing a talking point against the anti-renewables lobby groups. If it the comparison shows otherwise, then we would have a mystery to solve.

      From what I’ve seen of the AEMO data, I gather some great amount of the projected supply is contracted a few days ahead, and then more supply is bargained separately based on the variation of demand in these time blocks as actual time progresses to cater for the difference between projected demand versus actual demand. The data we would need for this calculation would be earnings specifically from variations in actual demand, not the pre-contracted projected demand.

  12. Paul McArdle 4 months ago

    For those readers interested to learn more about what actually went on in South Australia over this Monday, our guest author Allan O’Neil has posted some more considered analysis on WattClarity here:
    http://www.wattclarity.com.au/2018/07/high-sa-prices-on-monday-9-july-business-as-usual/

    Note – includes explanation of why transmission limitations were not just (and certainly not initially) due to Negative Settlements Residue.

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