Huge spikes in wholesale electricity prices in South Australia have been a result of energy companies “gaming” the system and exploiting their unusual market power to charge “monopoly rents”, according to an in-depth report by the Melbourne Energy Institute.

The analysis found fossil fuel generators may have withheld electricity at “strategic” times during 2015, causing massive price spikes, which have led to a $30.3m windfall.

The report also found evidence of similar practices from generators on 7 July that saw more price spikes, suggesting the so-called “energy crisis” in South Australia was a result of a severe lack of competition in the state’s energy market.

Wholesale energy prices in South Australia have been rising sharply, mostly driven by increases in the price of gas.

In addition, there have been huge spikes in the short-term wholesale spot price of electricity, sometimes rising to the cap amount of $14,000 per megawatt hour – up from the usual figure below $100.

Some commentators have blamed the price spikes on windfarms in South Australia and argued it showed the risks of relying on renewable energy.

But a detailed analysis of some of those price spikes has suggested they were caused by fossil fuel power generators strategically withdrawing supply of electricity for brief moments, pushing up the price they were able to charge for supply of electricity.

It also found evidence of fossil fuel generators engaging in a practice called “economic withholding”, where they exploited a monopoly position to charge exorbitant amounts for their supply.

Dylan McConnell and Mike Sandiford from the Melbourne Energy Institute found 41 occasions in 2015 when the Snowy Hydro’s Angaston diesel generator withdrew supply, pushing up spot prices. Combined, those 41 occasions delivered an additional $30.3m to the owners of generators across the market.

In addition, the report found AGL’s Torrens Island power stations engaged in behaviour that was “suggestive of market power abuse”, where it sold electricity in high price bands that would be impossible if there were more players in the market.

Examining 7 July 2016, which sparked weeks of media coverage, the researchers found AGL appeared to be engaging in that behaviour, which was “suggestive of market power abuse”.

“We only looked at AGL because it was the largest – but it’s quite likely that other generators are doing this too,” McConnell told Guardian Australia.

The authors found that, by several measures, the South Australian energy market is constricted and unable to function efficiently. For example, they found the large generators there are often in a position where their supply is necessary to meet the demand, making them a monopoly supplier.

They also found the generators in South Australia were able to gather much higher profit margins for each extra unit of power produced compared with other states, and that had increased significantly since May 2016.

The authors say that to improve the market efficiency the state could increase its interconnections with other states, or build energy storage like battery storage, pumped hydro or concentrating solar thermal.

The report was commissioned by the Australian Conservation Foundation. ACF’s chief executive, Kelly O’Shanassy, said: “South Australia should go further – a big solar thermal plant with storage would deliver power day and night and challenge the monopoly of gas generators.”

O’Shanassy said next week’s Coag energy council meeting – a meeting of state and federal energy ministers – was the perfect place to start a coordinated national plan to transform Australia’s energy system and address the lack of competition in South Australia.



“South Australia’s situation is different from other states, with a lot of renewable power and concentrated market power,” she said. “A coordinated national plan can help clean energy grow while avoiding the price spikes we’ve seen recently in South Australia.

“The clean energy revolution is here and it’s unstoppable. But it needs a plan to avoid disruption, look after communities and stop power price spikes that happen when companies play the market.”

The need for a planned transition was raised by the Australian Energy Market Operator this week in a report. It noted “the growing importance of network and non-network developments to securely manage an evolving, lower carbon electricity generation future”.

Its chief operating officer, Mike Cleary, said: “Possible solutions could include an increased interconnection across NEM regions, battery storage and demand-side management services.”

A spokeswoman for AGL told Guardian Australia that the recent high spot prices in South Australia “were driven by a number of factors”.

“With the closure of the Northern Power Station, the state is now heavily reliant on gas generation,” she said.

A spokeswoman for Snowy Hydro, owners of the Angaston power station said: “Angaston is a diesel peaking generator, which has high fuel costs and limited fuel reserves. As such, Snowy Hydro manages its operations to minimise unnecessary burning of high cost diesel fuel.”

She also noted that since the 41 price spikes identified in the report the Angaston generator has been voluntarily “scheduled”, meaning it can no longer simply switch its supply on or off as it pleases.

“As a scheduled peaking generator, we act to moderate and manage the security and reliability of the South Australian energy market at high demand,” the spokeswoman said.