The curious case of South Australia’s fossil fuel bidding patterns

Federal energy minister Josh Frydenberg was right when he said this week that the spikes in South Australia’s electricity prices were not the fault of renewables, but due mostly to other factors such as soaring gas prices, high demand, and a constrained network.

But he might have added other factors – factors cited regularly by South Australia energy minister Tom Koutsantonis – and they are the lack of competition in the South Australian market, and the power of the energy oligopoly it wants to break by having another inter-connector and more renewable energy.

These two graphs provided below by the ever-vigilant energy experts at the Melbourne Energy Institute invite a further potential cause, and that is the bidding strategies of the fossil fuel generators at the time of these big peaks.

The MEI’s Mike Sandiford says these two graphs below are interesting because they reflect similar demand and similar amounts of wind power availability on two different days.

Wind dispatch was similar (94 MW v 105 MW). The main difference between the two was the availability of the Heywood interconnector, which governed how much gas was used and how much competition there was in the market. On the day that the interconnector wasn’t available, prices were nearly 10 times higher than when it was.

“It tells you that it is not wind that is the main factor in price swings, or the demand,” Sandiford says. “Conditions were almost identical on the 7th and the 15th (of July) in terms of wind output, but the inteconnecter flows were much more stable, and allowed much more flow into SA (608MW vs 175MW).

But it is what happens when the inter-connector is not working, and the market is pretty much in the hands of local gas and diesel generators, when things get curious.

One chart is the half hour bidding cycles. Note in this graph below, how the price spikes happen at the 5th minute and the 10th minute of nearly every half hour interval. That, says Sandiford, is strange.  He also notes that the 24 spikes above $10,000/MWh are a record in Australia.

“The half hour cycling is very interesting,” he says. “Also note the peak prices don’t correlate well with gas dispatch, with gas declining during or just before peak pricing events which tended to be at the 5 and 10 minute period in each half hour interval.”

The way the wholesale electricity market works is that prices are set at five minute intervals, but financial settlement occurs at half hour intervals, based on an average price.

Big energy consumers, and the energy regulators and market operators, are concerned that this bidding pattern allows for distortions and higher prices.

They support a change in the rules to have settlement every five minutes, which would encourage new and fast responding technology such as battery storage to enter the market, bringing down wholesale electricity costs.

But these rule changes are being fiercely resisted by the owners of the gas generators, such as AGL Energy and Origin Energy, and their main lobby group, the Australian Energy Council.

It will be fascinating to see what conclusions the Australian Energy Market comes to when it releases its assessment of that week’s trading.