More on Australia’s Enron moment

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[5] shutdowns of pipelines by the Texas energy consortium Enron, and capped retail electricity prices.[6] 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,[6]:109 and market manipulation decreased supply.[citation needed] This caused an 800% increase in wholesale prices from April 2000 to December 2000.[7]: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.[8][9] 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.[7]: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.[citation needed] Enron took advantage of this deregulation and was involved in economic withholding and inflated price bidding in California’s spot markets.[10]

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.

Comments

  1. Generating electricity serves only one purpose – to affordably and reliably supply something modern civilization cannot do without.

    How is it that this extrordinarily complex marketing system that splits what is essentially a single, integrated system of production and delivery into many dozens of private owners of various bits and pieces of the whole, which then requires strict and constant regulatory oversight to prevent these individual profit-driven firms from gouging the nation or even threatening supply integrity – how in God’s name did this ever come to be veiwed as a more efficient way to go than a publicly-owned monopoly?

    • As far as I can see, the issue here is that we are promised a free market system that naturally seeks the most efficient outcome. The reality is that once corporations become involved, they use the rules to seek maximum profit. Sometimes they change the rules to maximise profit. The CEOs probably want to maximise their annual loots.

      The accepted ideas economists have promoted about the magic virtues of a free market are half baked and incomplete. The “free market” is a narrow subset of game theory. The “Game” is set by the rules and the players. In the case of Electricity supply as in this case, it is naive to expect a good outcome. What the public want is lower priced, better electricity, however if you look at the way the Game is arranged, the public are actually not players! The Corporations and the Government are the players and their idea of winning has nothing to do with the public. So, in that light, what other outcome would you expect?

    • “how in God’s name did this ever come to be veiwed as a more efficient way to go than a publicly-owned monopoly” you ask?
      The mass hysteria that took over the world known as Neo-liberal Economic Theory around about 1980 or so.
      We only just now are enjoying a bit of the buyer remorse. (nearly 200% GDP private debt, private monopolies of essential services, insolvent banking systems, etc.)

    • When it comes to energy and the environment I find myself wondering if we are all missing the obvious.

      1.  We are well past the point where carbon mitigation can prevent global warming to a degree which is socially observable and will lead to population shifts (internationally),

      2.  We are well past the point where the market can be relied upon to deliver social outcomes, and incorporate new carbon friendly energy generation and transmission initiatives without extorting the need to change to deliver a return to the 1%ers.

      That has me thinking we are in a world (or soon will be) where climate is ‘managed’ rather than something which occurs naturally, and brings us to the question of how it is managed, or in who’s interests it is managed.

      Normal everyday (moderately environmentally friendly) people would probably assume it would be ‘managed’ in the interest of being as like the world we have known in the past as possible.

      But in a corporatized world we can assume that the environment will be ‘managed’ in such a way as to maximise profits.

      What form would profit maximisation take?

      ………Get your money on a spectacular sales pitch promising plenty, a contract which delivers sweet FA, a client interaction running long on recorded messages saying ‘we value your call’ ‘the next available operator’ ‘your call will be recorded for coaching purposes’, peons reading from scripts – and rising levels of hostility by ‘minor stakeholders’ ……..

      Nationalising the system should be a very real prospect here – and stating straight out we run energy policy for public purposes (not profit maximisation).

      • ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++and there is more where that came from.

    • Who cares, the more they screw people, one of 2 things will happen. (a) it gets nationalised, (b) (quasi) legal off grid alts emerge. Actually who am i kidding, both will happen.

      The smart move would be to nationalize and carry the populist vote. But this can only be done after housing takes it in the tailpipe. As long as housing stays where it is at, we are all f*cked.

    • Perhaps the privatisation of electricity is doing exactly what ‘They’ wanted and understood the outcomes at the time. I found it astounding that under Jeff Kennet, Victoria privatised and divided the whole industry into many companies, each with a greedy cohort of execs and shareholders, ie a State of maybe 4 Million people at the time with so many ‘snouts in the trough’ companies running the energy supply.
      However after the recent debacles I can now see with my cynical eyes that privatisation was also done in order to introduce another form of invisible but highly political, behind the scenes manipulation that could be used over and over again very much like the financial system has become a semi-political tail wagging the entire dog.

  2. I spent a lot of time iin Southern California around 2000-2001, and I remember the blackouts well. The richest part of the richest state of the richest country in the world, and they had rolling blackouts! For this to be the result of corrupt market diddling by crims rather than valid technical reasons was astounding, and I can also recall how pissed off my friends over there were when all this came out.

    And now, as usual, Australia follows the American trend about 20 years later. My preference would be to shoot the bastards responsible for this sort of nonsense, to encourage the others. I guess that’s why I would never be good at politics.

    • “My preference would be to shoot the bastards responsible for this sort of nonsense, to encourage the others. I guess that’s why I would never be good at politics.”

      If you run for office I think I might consider voting for you.

      • Lol, thanks mate. Perhaps a single issue party along the lines of The (Corrupt Bastard) Shooting Party might gain some traction after all.

      • bring back public hangings… sends the right message. Actually screw that, hang, draw and quarter them, and broadcast it live as reality tv. that’ll get the ratings up.

    • And if this is the peak of capitalism at work then I will vote socialism every time. I dont know of any single privatisation anywhere that has brought us the benefits promised by the government of the day. I have lived in the UK and Aus in equal doses and see the same issues over and over. When we had electricity prices racing up to unprecedented levels, all blame was placed on the carbon tax.. In the UK it was blamed on something else however the real blame in fact could be laid fairly and squarely at the door of privatisation and the manipulative pigs running the show.
      Crony capitalism at its best. 3rd world economics at work

  3. Am I the only one who thinks public floggings/hangings would incentivise these people to do the right thing and not try and game the system/screw people over. Maybe we could sell tickets, PPV, all of that, another source of revenue in the budget

  4. So what about all that network gold plating we had to have because some people just couldn’t have their life saving equipment go down?
    Enron inspired death spiral on roids here we come.
    So will this be the year those bastards will come begging for a disconnection or network tax regardless of connection to the grid.

  5. It may be similar to Enron but not for the reasons you imagine.

    Enron was a huge regulatory failure, not a market failure.

      • This kind of lazy commentary comes from people who haven’t studied one tenth of the regulatory framework the economy is saddled with and won’t even acknowledge that electricity is as heavily regulated as any industry out there.

        Much easier to blame greed and self-interest than to look at the perverse incentives in place.

      • @ jono
        It was meant to be like this.
        Privatisation wrapped around with impervious layers of regulation make it very difficlt to pick apart.
        Sir Humphry would call it Masterly.

      • My time spent in the UK the last 20+ years leads me to observe that it takes almost that long for the regulators of privatised utilities to grow balls and be given the right powers to intervene and fine large monies. Which in turn creates new arbitrage opportunities. You guys night have some dark winters and horrible summers ahead of you whilst this plays out.

  6. So after all the crap LNP has given SA govt and Labor about renewables being the cause of SA’s issues, today we are getting notified that NSW needs to keep its energy usage down or the same will happen to it.

    Where are all the journalists pressing the pollies to explain why power outages in SA are windmill problems, and power outages in Vic/NSW are just ‘heatwave’ problems?

    I for one will not be turning down my power usage. The Fed govt deserves rolling blackouts in all its capitals so that they have to actually fix the issue and not use it as further fuel against their opposition.

  7. And yet the most reprehensible conduct in this matter has been the filthy lying thieving weasel politicians in Canberra.
    As if we could ever expect anything else.

  8. It wasn’t that long ago that SA Energy Minister Koutsantonis was praising the NEM & bragging about how SA was so involved in its design. LOL. Now he hates it. How things change.

  9. This story is such naive nonsense.

    The situation is easily fixed by having Intermittent Generators meet the same market requirements as Dispatchable Generators; bid for supply and guarantee deliver. When they can do that consistently the unreliability issues will be solved.

    Why should owners of reliable dispatchable generation be forced to forecast wind and sunlight on the off chance that they may be able to fill the void when the wind does not blow (or blows too hard) and/or the sun does not shine?

    It is clearly apparent that the author of the nonsense here has never stepped foot inside a power station and has little to no idea how the NEM works.

      • The ownership of South Australia’s messy, unreliable power supply with its subsidised intermittent generation being prioritised over dispatchable reliable generation would not alter the outcome. Power rationing and blackouts are the future.

        The objective to reduce carbon is inconsistent with having all the fossil fuelled generation idling on-line ready to take up the slack when the storm front comes through; pushing wind turbines into shutdown and blanketing the solar arrays or the high sits over Adelaide with calm, warm weather and the air-conditioners get working hard well into the evening. And there is an obvious cost to keeping the fossil plants continuously available but rarely dispatched that even publicly owned operator would find hard to justify.

        AEMO’s task of forecasting demand and scheduling generation is between a rock and a hard place. The BoM will have to do much more accurate and timely weather forecasting so the data can be fed directly into AEMO’s forecasting model that needs to be upgraded enormously to project the ups and downs of the intermittent generators with any certainty.

        SA has the power system that public funds have subsidised. In April, Hazelwood is out of the picture so Victoria will be in a similar position as SA now. Then SA will have buckleys of calling on Victorian dispatchable generation. My crystal ball is showing more power shortages and blackouts in SA’s future. Adding more intermittent generation will make the situation worse. Adding fast response GTs only fixes forecast conditions. Adding grid scale batteries/inverters will make SA power the most expensive in the world by a long margin.

  10. You’re saying that if the idle generator that was not brought on line despite several days advance warning of the coming conditions had been owned by the state – it still wouldn’t have been switched on?

    That they would have happily accepted the political fallout for blacking out huge numbers of homes and businesses without any reasonable excuse?

    I remain sceptical. The problem is rooted in the approach of treating what is necessarily a single system as a conglomeration of individual, autonomous, privately-owned pieces. The electricity industry we have today is an edifice of pure ideology rather than practicability – and this is risky considering that without what it produces, modern civilization stops.

    So under private ownership, who is now accountable to the public if the system fails? Answer – no-one.

    Return the system to full public ownership, making the jobs of those ultimately responsable up for reveiw by the electorate every few years. It won’t be perfect but it makes more sense than the ideological hash we have now.

    • And that’s what it comes down to – accountability – a concept sorely avoided for most of this century by governments and businesses alike. The new standard, inherited from end of last century operations like Enron, is setting up a situation in which you have no responsibility, make everything someone else’s problem and still generate a stack of money. Get what you can, without being blamed and get out before the whole thing come’s crashing down.