For those with memory longer than yesterday, which cancels out most of Australia’s political economy, it is useful to recall that the US west coast experienced a rather torrid time at the turn of the millennium as a friendly company called Enron ran riot in power markets, via Wikipaedia:
The California electricity crisis, also known as the Western U.S. Energy Crisis of 2000 and 2001, was a situation in which the United States state of California had a shortage of electricity supply caused by market manipulations, illegal shutdowns of pipelines by the Texas energy consortium Enron, and capped retail electricity prices. The state suffered from multiple large-scale blackouts, one of the state’s largest energy companies collapsed, and the economic fall-out greatly harmed GovernorGray Davis‘ standing.
Drought, delays in approval of new power plants,:109 and market manipulation decreased supply. This caused an 800% increase in wholesale prices from April 2000 to December 2000.:1 In addition, rolling blackouts adversely affected many businesses dependent upon a reliable supply of electricity, and inconvenienced a large number of retail consumers.
California had an installed generating capacity of 45GW. At the time of the blackouts, demand was 28GW. A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price. Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value. Because the state government had a cap on retail electricity charges, this market manipulation squeezed the industry’s revenue margins, causing the bankruptcy of Pacific Gas and Electric Company (PG&E) and near bankruptcy of Southern California Edison in early 2001.:2-3
The financial crisis was possible because of partial deregulation legislation instituted in 1996 by the California Legislature (AB 1890) and Governor Pete Wilson. Enron took advantage of this deregulation and was involved in economic withholding and inflated price bidding in California’s spot markets.
Fast forward to today and Enron has arrived Downunder as the energy transformation underway has invited a whole range of dirty tricks in the wholesale power market, from Reneweconomy:
It seems that you can ask the Coalition government a question about pretty much anything – plunging polls, Donald Trump, Cory Bernardi or even the weather – and the answer will always be the same: “We’re focused on electricity prices.”
Great. But what exactly is the Coalition doing about it? On the evidence to date, not a whole lot, apart from blaming renewables for soaring wholesale electricity costs and promoting something called “clean coal,” despite all the evidence pointing to the fact that coal generation it is not very clean, and not cheap.
They are chasing the wrong target. Australia has experienced some extraordinary high wholesale electricity prices this summer, and most of these price surges have come in states with little large-scale wind or solar.
It is the activities of the fossil fuel generators that are to blame. This is about competition, or the lack of it, and the fossil fuel generators have been going to extraordinary lengths to get rid of competition.
The Australian Energy Regulator has been investigating more than half a dozen “high priced” events, as it is required to do when prices jump above $5,000/MWh. Some of the reports it has already completed make astonishing reading.
Take the events of last November 18 in New South Wales, when the spot price of electricity jumped to more than $11,700/MWh in the mid afternoon, and bids of more than $13,700 were recorded over seven different trading intervals over the course of the afternoon.
These are the sort of levels that have caused conservatives in politics and many in the media to hyper-ventilate about the level of renewable energy in South Australia, and the proposed state-based renewable energy targets in Victoria, Queensland, and even the Northern Territory.
But here’s the irony. The number of high-priced events in Queensland so far this year are 40 (yes, forty) times more common than in renewables-strong South Australia. Did we hear a peep of protest from the Coalition about this? No.
The importance of the November pricing event in NSW is that – like so many other similar events – it shouldn’t have happened; but it did, because two players in the market – Origin Energy and Snowy Hydro – without breaking the rules, were able to game the market and eradicate competition.
This is how they did it.
According to the AER, there was a network constraint on the border between NSW and Victoria. These constraints are imposed when there is a risk of a network overload, and because of the way the constraints work, it means that the generators in NSW act as sort of “gatekeepers”.
If they increase generation, then it forces the Victorian generators out of the market, reducing competition.
This is exactly what Origin and Snowy Hydro did. According to the AER report, they bid 3,000MW of capacity to the price floor, flooding the market. That forced the Victorian generators, and most competition, out of the NSW market. It also put some caps on the output of some wind farms.
At the same time, according to the AER, Origin and Snowy “rebid the ramp rates” of their generators down to the minimum allowable by the rules. That ensured that the Victorian generators were kept out of the markets for as long as possible.
And what happened in the interim? Well, the NSW generators had a party. The lack of competition meant they could force prices up to their maximum level over seven consecutive bidding periods.
And, as I noted this morning, the SA blackout has similar characteristics to the Enron debacle both at the commercial and political levels:
There is a lot of confusion and an unconscionable amount of politics swirling around the east coast power crisis today so I’ve tapped my sources to get some facts straight. Here’s what happened in SA:
- the heat wave rolling across the east is testing the grid in every state;
- NSW will be threatened today, coal power-powered QLD has been having brownouts this summer in similar conditions;
- the associated demand surge in SA led to the Australian Energy Market Operator (AEMO), the regulator of the National Energy Market Operator (NEM), detecting a 3% power shortfall;
- prices in the wholesale market rocketed from their usual $70MWH to $14kMWH;
- SA’s Pelican Point gas generator, owned by French giant Engie, was running at half capacity but because the shortfall in power was small, it made a lot more money by not ramping up output than by doing so;
- to fill the deficit, rather than order Engie to ramp output, AEMO ordered the power distributor, South Australia Power Networks (SAPN) owned by HK business magnate Li Ka-shing, to cut power to 40k homes;
- it is unclear how these 40k homes were chosen;
- this is why the SA government is so pissed off. The National Energy Market (NEM) failed and it’s unclear why the regulator allowed it.
Thus the questions that need to be asked today are:
- why did AEMO prefer to cut than ramp gas power? Did it not have the authority to order Engie to boost output or did it make a mistake?
- why did Engie have sufficient market power to not ramp output?
- what structural changes need to be made to the NEM and AEMO so that it does not happen again?.
As you can see, these questions do not have a whole hell of a lot to do with the inherent reliability or otherwise of renewable power nor any shortfall in base load power. For that matter, in this moment of crisis they do not have much to with price of gas, either.
The pressing questions are about market structure, the NEM and functionality of the AEMO as the power mix shifts.
G.W. Bush backed Enron to the hilt in its assault on Democratic held California and it did help get The Governator elected then.
That’s how low desperate Do-nothing Malcolm has sunk.