One of the country’s biggest owners of electricity networks has launched an extraordinary attack against Australia’s biggest energy generators and retailers (so-called gen-tailers), saying their gas-plants are unreliable and accusing them of deliberately withholding capacity to push up prices.
The submission to the Finkel Review by Spark Infrastructure highlights the deepening divide between network operators and gen-tailers, over energy policy and markets in Australia.
Spark say the generators are proving unable to deliver reliable power at times of peak demand, and accused them of charging excessive prices for both their retail operations and their generators.
“It currently appears that generators are increasingly unable to deliver their full generation capacity when it is needed most,” Spark Infrastructure wrote.
It cited the failures of Snowy Hydro’s Colongra and Energy Australia’s Tallawarra gas fired generators in the midst of a heatwave in NSW on February 10, “just as energy demand reached its highest levels that day.”
It also cited fires that put Adelaide’s Torrens Island power station operated by AGL “out of action for weeks” – and also took out the Pelican Point generator. “We would recommend that the Review Panel take a closer look at the maintenance practices and market pricing decisions of energy generators.”
It slammed those market trading practices, accused the fossil fuel generators of “trading in scarcity” – effectively withdrawing capacity to manipulate markets. It said many generators were operating “far below their capacity, only offering electricity to the market for a very high cost.”
These practices are apparently legal in Australia – although not allowed in other countries – and have been highlighted in recent reports by the Australian Energy Regulator into the series of price spikes cross the grid this last summer.
The ACCC has celebrated these high pricing events as evidence of a market at work. Others have a very different view.
It prompted the likes of Jay Weatherill, the premier of South Australia who feels his grid is being held to ransom by the generators, of putting “profits before people”. He has announced plans to build emergency back up capacity to deal with the situation.
The extraordinary comments by Spark highlight the deep tensions between networks owners and the vertically integrated generators and retailers as they fight over the spoils and impact of a rapidly changing energy market.
While the fossil fuel generators have been seeking to protect their territory, Spark argues that “the future dominance of renewable energy is inevitable and irreversible” and it says government policy “needs to align with and support the transition to renewable energy.”
The networks are pushing for a rapid change in rules and market structure to cope with new technologies, the plunging cost of wind and solar and battery storage, and the shift to distributed generation, where up to half of all supply may come from households, businesses and community installations.
It sees this as inevitable and unstoppable. And in a report issued with the CSIRO last year, pointed out that unless market rules and policies are rapidly adapted to the changing technologies, then frustrated customers could simply choose to leave the grid – up to one third of them.
It says a rapidly decarboned and properly managed grid could save $100 billion off the cost of business as usual – mostly through fuel costs. But fuel costs are the main currency of the fossil fuel generators.
The networks feel that the gen-tailers are stalling because the two elements of the energy ecosystem most under threat from these changes are centralised generation and retailing – and the incumbent are seeking to protect their turf for as long as they can.
Spark took the example of the push by many fossil fuel generators for a form of capacity pricing, effectively a new subsidy to ensure that capacity remains in the market.
Spark’s says that there is little or no chance of any new coal fired generation, and even new gas plants would be under question, given the likelihood of some sort of carbon pricing within the 50 year useful life of a new generator.
“As a result, Spark Infrastructure believes that over a relatively short period, generation in the NEM will become dominated by renewable generation as the existing coal fired plants are retired. This will require significant changes to the operation and management of the grid.”
“While this cannot, in large part, be attributed to renewable generation, it has highlighted the need for a greater emphasis on grid security and on the need for investment in the grid and ancillary services to ensure supply reliability and system stability.”
Despite network costs accounting for nearly half of the average bill in most states, Spark complains that Wholesale prices and retail margins are higher than necessary, and that the biggest rises in recent years have come from “deregulated” retail and wholesale markets, while network costs have been kept at bay.
It says profit margins for Tier 1 providers are very high levels compared to global peers, and the lack of focus of network options (new interconnections) has allowed gentailers to extract high prices in wholesale markets and further boost their profits. Consumers have been the loser.
“It would also appear to create a perverse market incentive for those participants whom under current regulations may have contributed to the problem,” it writes.
It also accused retailers hiding behind the network businesses’ service to property charge in order to significantly inflate their own fixed charges.
“What customers are not told, is that only a small part of the fixed charge goes to the network businesses, which is the same for everyone within the network, and the rest goes to retailers even though they may already charge you extra for posting a bill, processing your payment and any other ‘additional service’ they provide to keep your account open”, ” it wrote.
“As recent experience in South Australia has demonstrated, the lack of interconnectivity into that part of the country provides the potential opportunity for generators, particularly gas fired operators, to legally exploit any supply imbalances that may arise by constricting supply and inflating prices.
“This represents an example of significant market failure and entails a material cost to consumers of energy.”
Giles Parkinson is a journalist of 30 years experience, a former Business Editor and Deputy Editor of the Financial Review, a columnist for The Bulletin magazine and The Australian, and the former editor of Climate Spectator.