



Fossil fuel electricity generators in South Australia withheld their supply to push up prices and reap bigger profits, according to an analysis of the causes behind the extremely high prices there in early July.

The findings suggested some solutions proposed ahead of this week’s Coag energy council meeting for the so-called “energy crisis” like increasing the supply of gas in Australia won’t help the situation at all.

The three things often pointed to as possible causes of the price spikes, especially on 7 July, have been the closure of the Northern power station, the main Victoria-SA interconnector being down and wind farms not producing much power.

But in a report commissioned by GetUp, energy analyst Bruce Mountain showed the generation capacity that was available in the market still far exceeded the demand. However, besides those owned by Origin, all other fossil fuel generators continued to operate far below their capacity, only offering electricity to the market for a very high cost.

In addition, Mountain showed the Australian Energy Market Operator (Aemo) forecasted that low wind and the interconnector maintenance would create high prices, which the generators could have responded to by ramping up supply and making solid profits.

“Yet, they did not respond to that information by making more of their production available to the market,” Mountain said in the report.

“Had this capacity been made available to the market at more reasonable prices, even prices far above production cost, those extreme prices would not have occurred.”

Mountain said Snowy Hydro, Engie, AGL and Energy Australia were exploiting their market power to push up prices. He said they weren’t doing anything illegal, but they were taking advantage of a market that wasn’t functioning properly.

“I think there’s a question of social license –and we’re seeing this in many other industries, where people are expected not just by the letter of the law but by the spirit of the law and maybe there’s scope for some of that to find its way into how we think about these things,” said Mountain.

Miriam Lyons from GetUp said the market is failing to deliver the competition needed to protect consumers’ interests.

“This shows that the answer to South Australia’s problems is not more gas, but more competition. Supporting cleaner suppliers of on-demand energy – like concentrating solar thermal in Port Augusta – would be far better for consumers, and for the planet.”

Mountain conducted a detailed analysis of how much the generators gained by withholding their supply. For the past eight years, wholesale prices in South Australia averaged $64 per megawatt hour. But in the first two weeks of July it averaged $433.

On 7 July in particular, there were 16 settlement periods (which happen every 30 minutes), occurring almost back-to-back, where the wholesale price was above $2,000 per megawatt hour.

Mountain said it was not conceivable their marginal cost of production could have been more than $300 per megawatt hour.

As a result, during that period the generators reaped $46m from the wholesale market. Mountain calculated they would have made only $5m if they had not charged more than $300 per megawatt hour.

Mountain said: “The fact that these generators did not compete to get their plant dispatched when prices were many multiples of their production costs suggest that these generators stood to gain more by withholding capacity from the market or, equivalently, making it available only at extremely high prices, than by competing vigorously to offer their production to the market.”

As an example of the concentrated market power in South Australia, Mountain pointed to AGL, which owns the Torrens Island power station. “It was privatised as a single power station … It’s capacity is almost equal to the average demand of South Australia,” Mountain said.

Last week, Dylan McConnell from the Melbourne Energy Institute released another report, which showed this sort of behaviour was occurring in South Australia, but didn’t look at July 2016 so closely.

McConnell agreed with Mountain’s analysis and said one simply way of alleviating the concentration of the market was to build more interconnectors with other states.

But he said another way was to diversify the sources of renewable energy.

“Wind is absolutely the dominant renewable energy source in South Australia. And the fact is that when the wind doesn’t blow, you’re creating these conditions that are more susceptible to market power abuses,” McConnell said.

He said concentrated solar thermal with storage or battery technology could be one solution. But he said the caveat was this can’t be owned by the owners of the current generators, since that wouldn’t increase competition.



McConnell questioned whether the grant made by the Australian Renewable Energy Agency to AGL to install a lot of batteries in people’s homes, which they would then control, was a smart move for that reason. “It’s a good project. But it’s increasing their market power where it explicitly shouldn’t be.”

