THE PERFECT STORM: ANALYSING THE ROLE OF GAS IN SOUTH AUSTRALIA’S POWER PRICES CLIMATECOUNCIL.ORG.AU Thank you for supporting the Climate Council. The Climate Council is an independent, crowd-funded organisation providing quality information on climate change to the Australian public. Published by the Climate Council of Australia Limited ISBN: 978-0-9953639-1-5 (print) 978-0-9953639-0-8 (web) © Climate Council of Australia Ltd 2016 This work is copyright the Climate Council of Australia Ltd. All material contained in this work is copyright the Climate Council of Australia Ltd except where a third party source is indicated. Andrew Stock Climate Council of Australia Ltd copyright material is licensed under the Climate Councillor Creative Commons Attribution 3.0 Australia License. To view a copy of this license visit http://creativecommons.org.au. You are free to copy, communicate and adapt the Climate Council of Australia Ltd copyright material so long as you attribute the Climate Council of Australia Ltd and the authors in the following manner: The perfect storm: Analysing the role of gas in South Australia’s power prices by Andrew Stock and Petra Stock. The authors contain sole responsibility for the contents of this report. — Petra Stock Image credit: Cover photo "Where Adelaide's Electricity Comes From" by Energy Systems Flickr user Michael Coghlann licensed under CC BY-SA 2.0. Researcher This report is printed on 100% recycled paper. Climate Council facebook.com/climatecouncil [email protected] twitter.com/climatecouncil climatecouncil.org.au CLIMATE COUNCIL I Contents Key Findings ............................................................................................................................................... i 1. Introduction ..........................................................................................................................................1 2. South Australia’s Transition to Renewable Power is in Line with Climate Change Action ........................................................................................ 2 3. The Anatomy of a Price Spike ......................................................................................................... 4 4. Outcomes .............................................................................................................................................11 5. Solutions .............................................................................................................................................20 6. Conclusion ......................................................................................................................................... 23 Appendix 1 24 References 25 Image Credits 26 II THE PERFECT STORM: ANALYSING THE ROLE OF GAS IN SOUTH AUSTRALIA’S POWER PRICES Key Findings 1 3 Interstate controlled power › Collectively, these events created The media focus on renewable companies used the recent the perfect storm for prices to energy enabled the parties and interconnector transmission increase. reasons responsible for South line outage with Victoria Australia’s recent high price to exploit their strong gas › Analysis shows these power events to avoid public scrutiny. generation market positions companies appeared to engage There is considerable cause for in South Australia, driving in deliberately unpredictable regulators to review the recent up prices to extreme levels. bidding behavior in July 2016, events in South Australia. Renewable energy was used inflating the price of electricity as the scapegoat, but prime on both the wholesale spot › A review of how the power responsibility actually lies market and future hedge companies exercised their with profit maximization by contracts. market positions, specifically the power companies. their bidding activities and the removal of Torrens Island › Power companies have used 2 capacity during the period of international gas export prices the Heywood interconnector to increase power prices across South Australia’s gas outage, is warranted to the National Electricity Market. generators earned around $178 determine whether any steps million in net margin on the should be taken in respect of › Recent power plant closures spot market during the July that conduct. and “mothballing” in the state high price events. increased the local market › A review of why the electricity power of these companies. › Past behaviour suggests they market operator and regulators will seek to pass these high allowed the planned Heywood › The removal of the Heywood power costs, now reflected in Interconnector outage to take Interconnector during South futures market prices, through place at a time when AEMO’s Australia’s peak winter demand to South Australian industrial own long term forecasts compounded the situation, and retail customers. showed the state would need allowing two companies - AGL this interconnector during peak and Origin – to control 80% of › The higher power costs winter demand. gas power generated in South could amount to triple South Australia. Australia’s share of the Heywood Interconnector › During the most extreme expansion capital cost. demand days, AGL made some of its Torrens Island capacity “unavailable”. This amplified the market position of these few companies. KEY FINDINGS III 4 5 6 Increasing reliance on South Australia needs more Regulatory and governance high-priced gas is not a competition from more structures of the National viable solution to reduce energy supply sources to put Energy Market (NEM) should power prices or to tackle downward pressure on power be reviewed to ensure climate change. prices. This means: they are fit to manage the transformation to an energy › Using more gas power in › More low cost renewable energy future focused around South Australia will not solve from a diverse range of sources, renewables. the price issue. Rather it will including increased solar reinforce it and make it worse photovoltaic and solar thermal, › The electricity transition by further entrenching the and more wind. underway to a low carbon market position of incumbents high technology future reducing competition. › Increased interconnector centered on renewables is the capacity by adding an interstate industries' biggest change and › It will increase reliance on link to New South Wales. challenge in over a century. the state’s ageing obsolete gas fuelled fleet, increasing › Encouraging in-state fast › The current infrastructure greenhouse emissions response energy storage and was not built on the back of including risks of fugitive demand management (for large the energy only market of the methane emissions – a potent energy users). last 15 years. Market design, greenhouse gas. Both are regulatory and governance contrary to national greenhouse structures should be reviewed gas reduction commitments. to ensure they are fit to manage the transformation underway. They currently are not. climatecouncil.org.au 1 THE PERFECT STORM: ANALYSING THE ROLE OF GAS IN SOUTH AUSTRALIA’S POWER PRICES 1. Introduction South Australia is at the forefront In July this year, South Australia experienced of efforts (both in Australia and a series of high wholesale electricity price globally) to transition the state’s spikes in one week, which some politicians power generation from fossil fuels and media commentators simplistically to renewable energy sources like linked to the state’s high proportion of solar and wind (Australian Energy renewable energy, particularly wind (For Council 2016). example, Australian Financial Review 2016; The Advertiser 2016a; The Australian 2016). This was incorrect. The mistaken attack on renewables enabled the principal reasons and parties responsible for the high price events to slip under the radar and largely avoid public scrutiny. This briefing paper analyses the role the “gentailers” (generator-retailers, companies owning both power plants and retail businesses) played in the high wholesale price spikes in South Australia, the lack of competition, and the conditions which enabled these companies to exercise the full force of their market power. For background, see the Climate Council’s initial analysis in our report “Mythbusting: Electricity Prices in South Australia” (Climate Council 2016). The mistaken attack on renewable energy has enabled the parties and reasons responsible for South Australia’s recent high price events to largely avoid public scrutiny. CHAPTER 02 2 SOUTH AUSTRALIA’S TRANSITION TO RENEWABLE POWER IS IN LINE WITH CLIMATE CHANGE ACTION 2. South Australia’s Transition to Renewable Power is in Line with Climate Change Action Last year, nations worldwide This is critical for Australia’s future given that (including Australia), agreed to act we are highly vulnerable to the consequences to limit global warming to less than of climate change, worsening bushfire two degrees Celsius at the United conditions, extreme heat, sea level rise and Nations Framework Convention on damage to iconic ecosystems like the Great Climate Change Conference of the Barrier Reef. Parties 21 held in Paris in December 2015 (the Paris Conference). Meeting Globally, the transition to renewable energy this goal requires all countries to is well underway. Annual investment dramatically reduce greenhouse gas in renewable energy is consistently emissions like carbon dioxide. outperforming investment in new fossil fuel power, and falling prices for wind and solar are driving record-breaking installations of renewable energy capacity - last year totaling