Lost energy regulators furiously fix wrong problem

It’s painful to watch as Australia’s energy establishment descends into the same old Aussie uselessness that dogs macro-economic policy these days.

While the east coast economy is burning owing to a fuel price shock that is fantastically easy to resolve, the energy regulators are busy addressing symptoms not causes:

Coal and gas power stations would receive payments to secure reliable supply and keep Australia’s ailing electricity system operating, as the government faces pressure to avoid blackouts and fix the ­national energy crisis.

The Energy Security Board has rejected demands for the fossil fuels to be cut from its draft ­capacity mechanism, saying it was essential coal and gas plants did not exit the power grid before replacement renewables and storage generation were in place.

The mechanism would allow generators to be paid for guaranteeing standby supply to meet ­demand, helping to avoid a repeat of the current grid suspension and incentivise companies to invest in new energy capacity.

But the states will retain the final say over whether to include coal and gas in the mechanism amid calls for it to be focused on storage technologies to support more renewables.

This does nothing to resolve today’s crisis. Capacity is not the problem. In fact, there has never been more relative to demand:

Today’s problem is fuel costs for gas and coal which has:

  • made electricity production uneconomic;
  • broken the NEM bidding system;
  • driven power producers to game the system via bogus breakdowns, and
  • put the entire system into regulatory care in which producers instead make money via compensation.

Sure, the coal fleet is aging and has problems, another strike against privatisation. And a capacity mechanism may help this, or may not, if it, too, is gamed.

But, the main problem today is simply that gas is $40Gj and should be $4Gj. Coal is $36o per tonne and should be $80.

Until you resolve that, a capacity mechanism will do precisely NOTHING to bring down power costs.

Install domestic reservation or export levies for coal and gas.

Houses and Holes
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  1. Install domestic reservation or export levies for coal and gas.

    Install decent politicians who care about the citizens wellbeing and are determined to act with honour in their role of representatives of the people.

    Once you have done that, the reservation, levies, or better alternatives will follow.

    • 100% – Albo and Bowen have proven themselves to be corrupt to the bone thus far… they know what they need to do, they just have other motives that involve obscure financial transactions that they cannot speak publicly about. #BrownPaperBags, just like the wonderful #JuliaGillard who we can all thank for getting us to this point of destruction of our nation’s economy & competitive advantages.

      There ought to be a royal commission into the approval of the three LNG plants on Curtis island without dom. reservation being a condition of approval. Gillard’s head ought to be on a stick frankly

  2. Albo has caved to the gas cartel. Won’t even be a one term govt. now. What’s also interesting is for years and years I’ve watched business gang up and crush labor. Now business is so powerful it’s actually crunching other business (ie energy companies now destroying manufacturing). It’s all over

  3. John HamiltonMEMBER

    See below a reply from a Labor MP I sent an email to regarding gas prices and reservation. King and Bowen must still be working on a good plan…ffs.

    Thank you for the email – and you’re quite right to point out that we have a very difficult energy challenge in Australia, not least because the former Coalition government absolutely neglected the need to make policy and investment decisions. That is a mess with which the new Labor government will need to grapple, and I know the Minister for Resources (Madeleine King) and the Minister for Energy (Chris Bowen) are working on that as I type these words.
    In WA we have had a gas reservation policy in place for some time, and it has been very effective.

  4. Display NameMEMBER

    No like Phil Lowe sagely pondering ignorance if wage stagnation and its solutiuons in the face of 240KNOM and 2.7M tmp visas, we will not solve real problems or key stakeholders would not like that

  5. DLS you need to give @AlboMP a polite phone call and spell it out as you do here above – he doesn’t seem to want to comprehend the issue at hand. If you get through, please tell him to grow a set, and do it for the nation if not his chances of re-election in a few years

    • Albo has zero chance of running a majority government after the next election, and a small chance at a minority government if he retains his seat.

      Bring on the independents.

    • lolololol you think Albanese is that dumb? All of them understand, both Labor and the LNP, the LNP doesn’t care and Labor is sh!t scared of upsetting the vested interests.

  6. Stephen Morris

    I’d be interested to know how much of that “capacity” is actually available in any five-minute bidding period.

    For example, solar capacity is not available at the mid-evening peak demand period.

    For those who are interested, the electricity market was originally designed with separate energy and capacity prices. The following is from my own notes written in the mid-1990s describing the system:

    It was felt that the economic efficiency objective would be best met if the decision to produce energy in any half hour [later reduced to five minutes] were entirely divorced from the need to recover capital costs.

    Accordingly, the approach adopted in the [England and Wales] Pool [and originally carried over to Australia in the early 1990s] was for the regulator to set a maximum value for electricity: the Value of Lost Load (“VOLL”). All available generators, whether or not they were actually called upon to generate, received a fraction of this value based on the probability that there would be insufficient capacity to meet demand. This fraction is known as the Loss of Load Probability (“LOLP”). (VOLL was originally set at £2.00 per kWh [$5.00 per kWh in Australia.] . This compares with a marginal cost of producing energy of only a few pence per kWh and illustrates the vast difference in cost between producing energy and power.)

    The price of electricity in each half hour therefore comprised:

    • an “energy component” to cover the marginal cost of producing the required electrical energy; and

    • a “capacity component” based on the VOLL/LOLP calculations.

    The energy component was calculated according to the principle of a market clearing price. All generators scheduled to generate were paid the price offered by the most expensive set scheduled (whether for generation or reserve) to meet demand. This price is known as the System Marginal Price (“SMP”).

    Leaving aside complexities relating to ancillary services, payment to generators was based on the pool purchase price (“PPP”) defined as:

    PPP = {Energy Component} {Capacity Component}

    = {SMP} {LOLP (VOLL – SMP)}

    PPP was defined in such a way that if the Loss of Load Probability rose to 1.0 (meaning that load was about to be lost) then PPP would be equal to VOLL. Similarly, if SMP rose to be equal to VOLL then PPP would also equal VOLL. (In theory the offer price of the set required to meet forecast demand would exceed VOLL, but under Pool rules SMP was limited to VOLL.) The formula thus reflects the intention that PPP should never exceed the cost of not meeting demand.

    Plant scheduled to run was paid PPP applied to actual output rather than forecast output.

    Plant scheduled for reserve was paid PPP less the incremental offer price for generating applied to the time the set was actually available for reserve.

    Plant available but not scheduled was paid LOLP (VOLL – Offer Price) applied to declared availability. Offer Price was the average price at which the set would provide electricity if operated at declared availability based on its offer.

    No doubt there are other reasons for the present problems, but the abandonment of capacity payments seems to be a plausible candidate.

  7. “Sure, the coal fleet is aging and has problems, another strike against privatisation.”

    That’s not quite fair. If you were operating a coal plant, how much would you invest in maintenance and upgrades if the nation was constantly telling you they’re going to transition away from your energy source and shut your plants down ASAP?

  8. Also, when you talk of capacity having never been higher, is that nameplate capacity or dispatchable capacity? Solar and wind can provide heaps of energy, however on still nights they provide nothing and thus only dispatchable generation matters. It’s no coincidence that our recent blackout near misses have happened during still nights. We have a lack of dispatchable capacity that is only going to get worse as more coal power plants are closed down.

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