How gas profited from S.A. market dominance, and blamed renewables

How gas profited from S.A. market dominance, and blamed renewables

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The gas industry profited enormously from electricity price spikes in South Australia. The media also played a role, using renewables as a scapegoat.

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The Climate Council has published a report outlining the high price events in the South Australia wholesale electricity market in late June and July. Like other reports, it found that an oligopoly of gas generators had exploited the market, and passed the blame on to renewables.

Its Key Findings were:

  1. Interstate controlled power companies used the recent interconnector transmission line outage with Victoria to exploit their strong gas generation market positions in South Australia, driving up prices to extreme levels. Renewable energy was used as the scapegoat, but prime responsibility actually lies with profit maximization by the power companies.

› Power companies have used international gas export prices to increase power prices across the National Electricity Market.
› Recent power plant closures and “mothballing” in the state increased the local market power of these companies.
› The removal of the Heywood Interconnector during South Australia’s peak winter demand compounded the situation, allowing two companies – AGL and Origin – to control 80% of gas power generated in South Australia.
› During the most extreme demand days, AGL made some of its Torrens Island capacity “unavailable”. This amplified the market position of these few companies.

Collectively, these events created the perfect storm for prices to increase. › Analysis shows these power companies appeared to engage in deliberately unpredictable bidding behavior in July 2016, inflating the price of electricity on both the wholesale spot market and future hedge contracts

2 South Australia’s gas generators earned around $178 million in net margin on the spot market during the July high price events.
› Past behaviour suggests they will seek to pass these high power costs, now reflected in futures market prices, through to South Australian industrial and retail customers.
› The higher power costs could amount to triple South Australia’s share of the Heywood Interconnector expansion capital cost.

3 The media focus on renewable energy enabled the parties and reasons responsible for South Australia’s recent high price events to avoid public scrutiny. There is considerable cause for regulators to review the recent events in South Australia.

› A review of how the power companies exercised their market positions, specifically their bidding activities and the removal of Torrens Island capacity during the period of the Heywood interconnector outage, is warranted to determine whether any steps should be taken in respect of that conduct.
› A review of why the electricity market operator and regulators allowed the planned Heywood Interconnector outage to take place at a time when AEMO’s own long term forecasts showed the state would need this interconnector during peak winter demand.

4 Increasing reliance on high-priced gas is not a viable solution to reduce power prices or to tackle climate change.

› Using more gas power in South Australia will not solve the price issue. Rather it will reinforce it and make it worse by further entrenching the market position of incumbents reducing competition.
› It will increase reliance on the state’s ageing obsolete gas fuelled fleet, increasing greenhouse emissions including risks of fugitive methane emissions – a potent greenhouse gas. Both are contrary to national greenhouse gas reduction commitments

South Australia needs more competition from more energy supply sources to put downward pressure on power prices. This means:

› More low cost renewable energy from a diverse range of sources, including increased solar photovoltaic and solar thermal, and more wind.
› Increased interconnector capacity by adding an interstate link to New South Wales.
› Encouraging in-state fast response energy storage and demand management (for large energy users).

6 Regulatory and governance structures of the National Energy Market (NEM) should be reviewed to ensure they are fit to manage the transformation to an energy future focused around renewables.

› The electricity transition underway to a low carbon high technology future centered on renewables is the industries’ biggest change and challenge in over a century.

› The current infrastructure was not built on the back of the energy only market of the last 15 years. Market design, regulatory and governance structures should be reviewed to ensure they are fit to manage the transformation underway. They currently are not.

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  1. David Rossiter 4 years ago

    On the front page of today’s Australian Sid Maher attributes the price spike in South Australia to renewables. It would be worthwhile sending this report to him. I have already emailed him some comments of a similar vein defending the innocence of renewables. The email address I used was

  2. Malcolm M 4 years ago

    There must be intense internal pressure within gas companies such as AGL to make profits from the domestic market to compensate for losses on the export business. I recall a report from AGL where the price contracted to exporters was ~$2.30/GJ until 2017. This was linked to the oil price, and at the time of signing they could probably not foresee such low oil prices. Furthermore, low oil prices led to the gas industry slowing its rate of drilling, but were still locked into gas supply contracts. A buyer on such a good deal is unlikely to relent. AGL no doubt did calculations indicating that gas supplies would be tight, but just sufficient to meet these commitments. That was until the double whammy of a cold snap and 1 GW of coal generation going offline. With little spare gas, spot prices briefly went as high as $22/MJ in Adelaide. If some gas had to be bought on the spot market to fulfill the export contracts…oh the pain ! And where else to recover some profits but the domestic market.

  3. David Rossiter 4 years ago

    The results of this report from The Climate Council highlight how poorly the markets are operating unless one is a beneficiary.
    AGL has already shown how it can double its market capitalization over the last five years by buying up cheap brown coal fired assets (Loy Yang A) and generating very cheap electricity into the NEM now we have no carbon price to stop this sort of behavior. Andy Vesey is saying the capitalization is now A$13 billion and the National Greenhouse and Energy Reporting Scheme tells us they are the biggest emitter in Australia at 38.3 million tonnes. Further that data shows us AGL is very dirty – its average emissions from its fossil fuelled plants are over 20% higher than the average for the national electricity market. Yet AGL was a gas company and claimed to be biggest green energy generator in 2005 to 2010. Not so in 2014-15 it is 20% dirtier than average and the biggest emitter in Australia.
    Now we hear that AGL and Origin have been rigging the South Australian gas market by starving one gas fired plant to benefit others. Time for a Royal Commission into the National Electricity Market?? These are serious numbers for destruction of our environment and our economy.
    But there is more AGL has generously promised to phase out its recently acquired coal fired plants in 2050 recognizing it is a large carbon emitter. A phase out of second hand brown and black coal fired power plants in 34 years time has to be the best joke this year they will be ancient at that time some over 60 years old. What is going on here? Does AGL know we have committed to a global 2 degree limit at Paris in December 2015? Do they know we have a carbon budget if we are to be considered global citizens? Do they know that at current rates we will run out of that budget in about 2032? Do they know this means we will then be expected to produce a net zero emissions from 2033 onwards?
    This is developing into a wonderful Greek tragedy how far can AGL go before someone notices what they are doing. Will Josh Frydenberg, the former “Mr Coal” and the responsible Minister now for environment and energy take AGL to task on this? A$13 billion can fund a lot of silence……. Democracy has become oligarchy as Plato’s Republic forecast around 2000 years ago.

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