“I’ve never seen anything like it; with -$1k to +$14k in consecutive 5-minute periods. Chaos ensued.”

That was the response of a senior Tesla Energy executive this week after the extraordinary scenes in South Australia’s electricity market on Monday, when the fossil fuel generators had a party and prices swung from $14,200/MWh to minus $1,000/MWh in a matter of minutes.

The upshot of these price swings was that the cost of South Australia’s wholesale electricity averaged $710/MWh that day – more than 10 times its recent average.

The price spikes, as we reported at the time, was caused neither by a period of high demand, nor by a shortage of supply. The generators simply profited from a series of network constraints, and a period of low wind and solar output, to fill their wallets.

As we reported on Monday, and again on Tuesday, they were able to do so because most of the gas plants were not running at full capacity and the main diesel generators – three of them operated by the federal government-owned Snowy Hydro – had a price gouging party.

As analyst Allan O’Neill writes in this in-depth observation on WattClarity, most of the units at AGL’s Torrens Island gas station were running, but were dialled down. One of the two big units at Pelican Point was offline.

That gave room for the diesel generators to control the bidding, and enabled everyone – including the Torrens Island and Pelican Point generators – to profit.

The Coalition government, predictably, blamed renewables, or the lack of them, for the price hike. Resources Minister Matt Canavan raised it on Q&A when defending the need for base-load coal.

“One of the reasons power prices are so high in South Australia today was that the gas price was around $10 a gigajoule – which is very high, about three times what it was a few years ago,” Canavan said.

“We, of course, don’t have coal-fired power stations in South Australia anymore. We’re not using or developing more coal. We’ve got to have baseload power as well as renewables.”

Canavan is truly delusional if he believes this has anything to do with the lack of baseload or the cost of gas. It has everything to do with market bidding strategies and the lack of competition.

The irony is that it was the government-owned Snowy Hydro that was at the heart of this bidding strategy, using its three diesel generators to repeatedly push the price up to $14,200/MWh in the first five-minute period of the each 30-minute pricing period.

This guaranteed a price of at least $2,500/MWh for the 30 minute period. But to get their share of the profits, the gas and diesel generators then had to bid the price down to the market floor – minus $1,000/MWh – so they became “must run” generators and get the credit from AEMO.

It’s a classic ruse, and South Australian consumers have been getting screwed by the lack of competition and these greedy bidding strategies for decades.

Rarely, however, does it happen at this scale and this length of time. This bidding was repeated nearly a dozen times over the next few hours, led by utility that is owned by the government that is claiming its focus is on reducing prices.

Never has a claim seemed so hollow, particularly as it is accompanied by calls for new coal fired generation.

The market for FCAS – frequency and ancillary services – has been a classic case. When AEMO has to impose significant network constraint, it asks for 35MW of FCAS capacity from South Australia-based generators.

In a breathtakingly cynical ploy, these fossil fuel generators would inevitably fall just 1MW or 2MW short of capacity, and would then price the last single MW at the market cap, which in the FCAS market is $14,000/MW.

The regulators just stood by and watched: ACCC chairman Rod Sims said last year that it was the “market at work” and this week he produced a 369-page report that claimed there had been little or no market manipulation.

And he said in a speech the following day, it’s OK for big market players to gouge consumers.

“It is not illegal for a company to put their prices up, or even to price gouge, as this term is commonly understood,” Sims said.

But while the FCAS rort was smashed by the arrival of the Tesla big battery, which although only relatively small was big enough to grab a substantial share, that battery has struggled to make a dent in the wholesale market.

That’s partly due to its size – only 30MW/90MWh is available for wholesale market arbitrage – but also due to the market structure, which favours this rebidding.

Unlike fossil fuel generators, batteries like the Tesla big battery at the Hornsdale Power Reserve can charge and discharge quickly. But there is no point doing so in the same 30-minute period because the 5-minute intervals are averaged out, so the price for charging and discharging would be the same.

The gaming in the 30-minute period, which has taken place across the National Energy Market – but has been worst in South Australia and Queensland, where there is little competition – was the main reason why big consumers like zinc refiner Sun Metals pushed for the introduction of the 5-minute settlement periods.

The big incumbent generators like Snowy Hydro, AGL and Engie fought this rule change furiously, and succeeded in having its introduction (first proposed in 2016) delayed until 2021/22 – in contrast to the much more complex NEG and its various obligations being introduced in a fraction of that time.

The battery storage companies and demand management companies like EnerNOC argue that the 5-minute rule is essential to stop the gouging, and to encourage fast-moving technology like batteries and demand response.

AEMC chairman John Pierce finally admitted that the five-minute settlement period would “lower wholesale costs, which should lead to lower electricity prices than in a market with 30 minute settlement.”

Pierce also acknowledged that more accurate price signals would also encourage more efficient investment in flexible technologies such as aggregating distributed storage, new generation gas peaker plants and rapid demand response.

That was after fierce resistance from the incumbent generators, including those at the forefront of the market manipulation on Monday,

“AGL does not consider that there is a material problem with the design of the wholesale electricity market to the extent that changes to market settlement times are warranted,” AGL Energy said in its submission. “Accordingly, AGL does not support the proposed rule change.”

It claimed moving to 5 minute settlement will “cloud” the incentives of fast start generators during a price spike event, because they are not as fast as battery storage and most take longer than 5 minutes to respond. It says this could result in some peaking plants leaving the market.

Snowy Hydro said “there is no material problem that warrants the major costs and disruption that would result from the proposed rule.” It has also opposed demand response on the basis that it amounts to “enforced blackouts.”

Other major generators such as Engie, ERM Power, Origin Energy, Energy Australia and Stanwell also opposed the move to 5-minute settlements.

So how did Tesla go on Monday when the bidding went wild? Hard to say, but it is understood it “followed the peaks”. So it probably made money. But as that executive noted: “The case for 5-minute settlements has never been clearer.”

Imagine if there were more batteries, and more demand response, and even virtual power stations. At least then, when the prices spiked due to need, it would be the consumer that could share in the profits