When generators jack up prices 100-fold, and regulators do nothing

A reader sent in an email late last week about the huge price spikes in Australia’s wholesale electricity market in the midst of the heatwave that swept south-east Australia.

In what other industry, he asked, can you see such sudden gyrations where prices jump 50-fold or more in a matter of minutes? And how is this allowed?

They are perfectly valid questions.

The huge jump in prices – often from ar0und $50/MWh to peaks of more than $14,000/MWh – have been happening for years, and well before the introduction of large and small scale renewables that often cop the blame.

(This graph above highlights the number of price spikes above $5,000/MWh recorded by the AER in a previous report).

The wholesale electricity market is dominated by the major generators (coal, gas and hydro) who have the ability to add or withdraw capacity at their whim, and who are able to manipulate prices in times of “scarcity” – real or manufactured – because they can.

And because no one will do anything about it.

The Australian Energy Regulator said late last week that it would “report on” the price spikes in Victoria and South Australia that occurred last Thursday. But don’t expect a report anytime soon, and don’t expect it to cause any problems for the market players involved.

It will likely find that the price spikes were a “market” response to a sudden loss of capacity – in this case the tripping of one of two Loy Yang B units on Thursday afternoon that removed 530MW without warning. It will take the AER two months to tell us that.

Even when the price manipulation appears contrived and deliberate, nothing ever happens. Take, for instance, reports by the AER into two price spikes in a related energy market last year – the market for Frequency control ancillary services, or FCAS.

The FCAS market – which provides grid services to make sure, among other things, that the frequency of the network is under control – is not a market that is ever in short supply.

In South Australia, where most of the price spikes occur, there is more than 400MW of capacity, and the Australian Energy Market Operator only ever needs less than a tenth of that – 35MW – such as when the inter-connector is down for repairs or sudden failures.

But every time AEMO calls for this capacity to be put on standby, the price shoots up. Why? Because the main providers – AGL, Origin Energy, and Engie – simply refuse to sell their capacity at normal market prices.

Often times, as we have reported on numerous occasions, and most recently here – they make only a total of 34MW available at normal prices, but charge $15,000/MW for that last MW. That sets the price for all the capacity needed.

Sometimes, the actions of the generators are quite deliberate. Take October 24 last year, when an unexpected equipment failure on the interconnector linking Victoria and South Australia forced AEMO to invoke its call of 35MW of FCAS support, in case it was needed.

The AER report into the incident noted that at the time there was more than enough “low-priced” capacity in the “raise regulation” market. But within six minutes of the AEMO announcement, that all changed as AGL bumped up its prices around 100-fold.