The Perfect Storm: Analysing the Role of Gas in South Australia’s Power Prices

South Australia’s power companies made over $178 million in net margin during the July high price events, our new report has found.

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KEY FINDINGS

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 maximisation 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.

5. 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 centred 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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