SA power play backfires



What a lovely day for scaremongering. On 7 July this year, South Australia experienced a cold snap. As residents turned on their heaters, the still and cloudy conditions meant wind and solar power couldn't contribute much to meeting electricity demand. The last coal plant at Port August had closed a few months before, pushed out of the market by renewable energy.

Pollution distribution system, cartoon by Greg FoysterWhat would happen? The fossil fuel lobby was watching closely because it doesn't want South Australia's wind farm boom repeated around the country. If anything went wrong, could renewables be blamed?

As if on cue, the spot electricity price spiked, reaching $8898 a megawatt hour at 7:30pm. (For comparison, the average price in South Australia is about $60 a megawatt hour.) The cold weather continued the next week and prices spiked again, sparking gleeful headlines about an 'energy crisis' in the Murdoch press. Clearly, went the line, the price rise happened because South Australia was too reliant on wind power. Why else?

Why else indeed.

A month later, the story that's emerged in reports from energy industry academics, data from the market operator, and reams of expert analysis isn't the one the fossil fuel lobby wanted told.

Instead of a lesson about the danger of too much wind power, it's about the danger of too much market power in the hands of a few big players. Energy behemoth AGL, among others, stands accused of unscrupulous practices to inflate the price of electricity.

So what really happened? Here's the historical context, which the tabloids tend to leave out. Isolated at the end of our National Electricity Market and reliant on expensive gas generation, South Australia has traditionally had more volatile wholesale electricity prices. (The wholesale price isn't what households pay, but does flow through to residential power bills.)

South Australia also has excellent conditions for wind power, which can lower the wholesale electricity price because, unlike coal or gas, wind turbines don't have to pay for fuel. Under the federal Renewable Energy Target and state government policies, investment in clean energy boomed. Wind power now provides about 34 per cent of the state's electricity, and rooftop solar about 7 per cent.


"The transition to clean energy has to be handled carefully so that closing a coal power station does not give the remaining generators a market stranglehold."


This has wreaked havoc with the business models of the state's fossil fuel generators — particularly coal power. Many of the larger and older coal plants were designed to run continuously. It's expensive and inefficient to switch them on and off. If wind underbids coal often enough, coal power stations become uneconomic. In South Australia, low-cost wind power has forced the state's two coal plants to close — the last one, Northern, shut in May this year.

While a good thing for reducing climate pollution, these closures have delivered unprecedented market power to the remaining gas generators — especially AGL. And market concentration makes price manipulation more likely. The Australian Energy Regulator (AER), the organisation responsible for policing the national electricity market, describes how some generators have previously inflated prices in South Australia: 'When the demand-supply balance is tight, these generators can rapidly reduce output, causing the dispatch price to spike. The generators then boost output for the remainder of the trading interval to capture those higher prices.'

As the AER notes, 'this behaviour is not transparent, making it difficult for other participants to react to their commercial advantage'.

In South Australia, this behaviour tends to coincide with periods when the interconnector that allows electricity to be imported from Victoria is out of action. On 7 July the interconnector was at 50 per cent capacity for a scheduled upgrade. At the same time, wind was low, demand was high and gas prices were through the roof due to the cold weather and competition with LNG exports. The result was a perfect storm of conditions, handing AGL 'unprecedented market power', writes Mike Sandiford, Chair of Geology at the University of Melbourne.

What happened next was predictable. In the words of former Origin energy executive Andrew Stock, AGL and other gas generators engaged in 'deliberately unpredictable bidding' to cause a record number of price spikes.

This isn't to say wind power didn't play some role — the Australian Energy Market Operator, which runs the market, told energy ministers that low wind was one of five factors involved. But there's also evidence renewable energy has reduced price volatility. In South Australia, the price spiked 51 times in the summer of 2008, before the wind farm boom, but only once in 2015.

Generators in South Australia certainly have a case to answer. A recent Melbourne Energy Institute report, commissioned by the Australian Conservation Foundation, found evidence of AGL's Torrens Island gas plant 'economically withholding' capacity, which was 'suggestive of market power abuse'. (AGL says the gas plant had a unit out of production for safety and compliance work.)

Yet another report, by energy consultant Bruce Mountain, found the only plausible explanation for the price spikes on 7 July wasn't becalmed wind farms, but generators that deliberately withheld capacity. In eight and a half hours, they reaped $41 million more than they should have.

What can we learn from all this? For one thing, the transition to clean energy has to be handled carefully so that closing a coal power station does not give the remaining generators a market stranglehold. For another, most of what's published in the media about renewables and power prices is bullshit peddled by vested interests.

The fossil fuel lobby probably thought blaming wind power for the price spike in South Australia would slow the roll-out of wind turbines across the country. Instead, it may have the effect of drawing attention to their abuse of market power, bolstering the case for rule changes which would increase competition.

Yes, all eyes are in South Australia — but not for the reason coal and gas companies might have hoped.


Greg Foyster headshotGreg Foyster is an environment journalist, an alumni of Centre for Sustainability Leadership, and the author of the book Changing Gears.

Topic tags: Greg Foyster, climate change, South Australia, wind power, solar power, renewable energy



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Existing comments

Coal fired base load power has been replaced by wind and solar. However, when the wind does not blow and the sun does not shine, the users of the clean base load want a last resort provider. Your conclusion is there is gouging and fraud to cause inflation within the "last resort" market but this is not possible to prove. It is clear that as SA moves more and more to clean power the risk is the entire state will be without any power for periods of time. How does global warming effect the distribution of wind as we go forward. Are the turbines in the right place ? House holds can only circumvent these circumstances by owning batteries which can store previously delivered oversupply of clean energy but with an absence of wind and sun for a prolonged period, these situations will only get worse. The people pointing the finger have created the problem. Not the other way around. It is folly to expect the person holding the last supply to hand it out at a fixed low price as this would represent a mis pricing and there would be no power from that provider either.
Luke | 26 August 2016

Nice article , thanks. The SA episodes do as well point out that "clean energy" is expensive and has to be backed up by hydrocarbon (or nuclear to hydro) to guaranteed steady supply i.e. a mixed system is mandatory. One end result of these changes is (much) more expensive energy bills (or subsidising taxes), and the Green-lobby needs to be upfront about this. It also needs to be up-front with the factual reality that this extra expense on household is just a feel-good gesture ; it makes no difference at all to climate change. The later depends only on what China, India and USA do. When the penny drops,public attitudes will change rapidly.
Eugene | 26 August 2016

Hi Luke, Thanks for the feedback. It might be worth reading some of the reports cited - starting with the Australian Energy Regulator's State of the Energy Market Report (2015), which makes a clear case for 'rebidding' as the cause of wholesale price spikes in SA and QLD over the last few years. Tellingly, QLD has no wind farms at all, but had huge price spikes during the March 2015 heatwave. Why? The regulator blames dodgy rebidding practices, and they would know because it's their job to police the market. Market concentration can be quantified with the 'Herfindahl-Hirschman Index'. The University of Melbourne's Energy Institute report measured this in SA and found market concentration levels above the value the ACCC uses to flag competition issues. So there are serious imbalances in this market. See p.4 of that report: Finally, energy analyst Bruce Mountain shows in his report that there was more than enough capacity in SA to meet demand, but it was deliberately withheld to push up prices. See table on p.15 of his report here: There are a few ways to remedy the problem. Better market rules is one. Another, as you've suggested, is batteries. Another is 'demand response' (i.e. consumers choosing to use less power at peak times). Another is an extra grid interconnector. Another is a solar thermal plant, providing competition in 'synchronous generation' to the gas and diesel generators. What most people don't understand is that this change in our energy system is going ahead no matter what. AEMO forecasts no new coal plants over the next 20 years, only wind and solar. So even the market operator says the transition is happening - and fast. No one is asking for a fixed price. Just changes to the rules . See:
Greg Foyster | 26 August 2016

Poor forward planning by the SA government is a dereliction of responsibility. What happened to - hope for the best, prepare for the worst? Luke is right. The worst did happen, so how would one expect the alternate supplier of electricity to act? AGL is not a charity. It is a business. Labour governments may not like Big Business but they must learn how it operates and learn to live with the reality of a mixed economy.
Uncle Pat | 26 August 2016

Luke suggests it would be folly to expect a supplier to maintain the previously agreed fixed price when they have become the supplier of last resort. I would suggest that it is perfectly appropriate to continue to supply the essential commodity at a price that gives them a fair return on investment. It is reasonable to assume the previously agreed price would do that. Gouging is gouging, no matter what the temptation.l
Vin Victory | 26 August 2016

Corporate thieves feeding off governmental over-reaction in the search for votes on the back of environmental concern.
john frawley | 26 August 2016

And what colour electricity was SA hoping to import from Vic? Green or brown (the evil coal generated variety)? It's all very well and trendy for SA to trumpet its green credentials but they have to rely on the 'dirty' generators to bail them out.
Peter | 27 August 2016

Gas-fired generators have two big advantages. First, agility, which benefits them against coal-fired plants. Second, unburnt gas is available when wanted, which benefits them against wind and solar PV. On two counts, the gas-fired plants are "price makers". Wind and solar PV are "price-takers"; they cannot hoard their energy supply. In effect, gas-fired generators have a monopoly of supply when renewables are out of the market. Solar-thermal and battery storage are good defences against the monopoly power of these companies, and this is what they fear.
Peter Horan | 28 August 2016


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