The disaster that is Australia’s spot electricity market

Most economists love markets. In theory, they efficiently allocate costs and benefits. A well-designed and operated market can do this.

But markets rely on an assumption that there are enough participants and sufficient activity that the actions of a single participant are not enough to significantly distort prices. 

Unfortunately, many important markets don’t fit this model. China’s domination of global rare minerals markets allows it to undercut the viability of competitors. The global oil cartels have often manipulated prices.

Australia’s National Electricity spot market has a more subtle issue. Spot market suppliers, including gas generators, hydro generators, batteries and demand response businesses have similar business models.

It is in their interests to maximise spot market prices because, even if they are not the highest bidder accepted, all participants at critical times are paid the highest bid price needed to maintain reliable electricity supply. This drives up consumer costs in a market that is supposed to deliver lowest long term costs for consumers.

Recently the Australian Energy Market Commission noted that batteries bid an average of $478/MWh this year, compared with $245 last year. But battery costs have fallen. Artificial Intelligence is allowing bidders to game the system. Players with a mix of supply resources can play games – and they do.

It has been claimed that the spot market is economically efficient. In principle, it could be, but it’s not.

In my recent submission to the NEM Review, I asked a key question. What would be the lowest price a generator (or battery or demand manager) would accept to operate at a critical time?

What price would cover their costs that might involve start-up and shut-down and operating costs, while delivering a ‘reasonable’ profit? No-one seems to have asked this question. So each supplier gets the highest bid price in a bidding interval without any accountability.

The NEM objective includes an element that consumer benefit should be delivered. The spot market does not seem to have delivered. 

It must be fixed. 

Spot market bidders should be penalised if they bid above a ‘reasonable’ price based on their real world circumstances.