Price-gouging and market failure behind the South Australian blackout

Picture taken during one of South Australia's blackouts.
Friday, February 17, 2017

Right-wing politicians have blown hard on the anti-renewables dog-whistle since February 8, when extreme temperatures in South Australia were followed by rolling electricity blackouts.

Late that afternoon, power demand in the state spiked to near-record levels. From about 6pm, 100 megawatts — roughly 3% of the state’s total demand — was shed for about half an hour.

Federal energy minister Josh Frydenberg leapt to the attack. “We’re not politicising the fact that there is an insecure energy system in South Australia,” he declared. “High renewable energy targets, be it in that state or in other states, put in place by Labor governments is [sic] going to bring great instability.”

Prime Minister Malcolm Turnbull was not far behind, claiming on February 10 that South Australia’s Labor government had “mindlessly, complacently, negligently introduced more and more renewables into their grid.”

Other prominent Liberals demanded a return to coal. In federal parliament, Treasurer Scott Morrison even wielded a lump of coal during Question Time, gleefully declaring: “This is coal — don’t be afraid, don’t be scared”.

South Australian opposition leader Steven Marshall argued that the state government needed to “press the pause button” on the demolition of the coal-fired Northern Power Station near Port Augusta. The Northern Power Station, the last coal-fired electricity generator in South Australia, shut down in May last year, its economics undercut by wind and solar.

Power outages are a keenly debated political topic in South Australia, where extreme weather has caused a series of blackouts over the past five months. In the worst case, on September 28, the entire state was left without power after a series of tornadoes brought down key transmission lines.

So what are the real lessons to be taken away from the latest blackout, after we’ve dodged the polemical lighting bolts?

Just resting

First is that South Australia was never short of generating capacity on February 8. The equipment just was not switched on.

Why not? The events of that afternoon beggar explanation. But there is strong cause to suspect price-gouging by energy corporations intent on cornering the market, with a view to turning already handsome profits into a killing.

Joined by high-voltage interconnectors, South Australia and the eastern states, including Tasmania, share a common electricity grid overseen by the Australian Energy Market Operator (AEMO). This agency forecasts likely energy demand and invites power generating organisations to make price bids for supplying electricity to meet the requirements.

At midday on February 8, AEMO notified the market that supply in South Australia was expected to become extremely tight. For the generating organisations, this was the signal to lodge bids and prepare their plants in anticipation of sales at premium prices during the evening peak.

Curiously, the bids failed to come. Although the price that suppliers could expect was understandably “very high”, there was no market response. The corporations showing a lack of interest included ENGIE, owner of the gas-fired Pelican Point generating plant near Port Adelaide. The 160 megawatt turbine could, given about four hours’ notice, have been brought on stream. The extra power would have covered the evening’s requirements comfortably.

Questioned later, AEMO executive David Swift said he was unaware why ENGIE had not responded to AEMO’s market requests. There were no technical problems stopping the turbine from being started up — as, indeed, was done the following day. But on February 8 it remained out of action.

Just after 5pm, about an hour before the power cut began, AEMO contacted ENGIE to inquire whether the Pelican Point turbine could be brought into operation. But senior control room staff of the two organisations concluded that this could not be done in time to prevent load-shedding.

What was behind all this? One possible answer has been suggested by energy economist Bruce Mountain. In a report commissioned by GetUp!, Mountain demonstrated that the firms Snowy Hydro, ENGIE, AGL and Energy Australia had been exploiting their market power, withholding supply to push up prices.

Using detailed analysis, he showed that in the first two weeks of July last year artificial restriction of supply raised wholesale power prices in South Australia to an average of $433 per megawatt-hour. The average over the previous eight years had been just $64.

Mountain pinpointed the cause of the recent South Australian blackout as attempts by fossil energy firms to manipulate price levels.

“When the renewables are not … making enough electricity,” he told the Guardian, “the fossil fuel generators have the market to themselves. And as we know from studies that I’ve done from 2008 onwards, they can and do corner the market.

“If you decrease your output by half but as a consequence increase your price by a factor of ten, you’re better off decreasing your output.”

Faux competition

Market-rigging, of course, requires notionally competing firms to coordinate their moves. If supply is withheld until the market starts to scream, but none of the faux-competitors then provides a limited, just-in-time packet of goods, the whole exercise becomes pointless. Such a breakdown of coordination may have been behind the February 8 South Australian blackout, when no offers of extra supply were made.

AEMO’s performance on February 8 may not have been above reproach either. On its website, the agency pledges: “AEMO’s vision is to deliver energy security for all Australians.” Most of the time, however, AEMO does not deal with “all Australians”, but with those who are senior executives of energy corporations. The agency does not seem immune to prioritising the corporations’ interests.

As Swift acknowledged, his organisation has the power to direct energy suppliers to activate plants during periods of high demand. Why did AEMO not instruct ENGIE to start up its Pelican Point turbine on February 8 when this could still have forestalled load shedding and when no supply bids were being received?

Swift has indicated that AEMO underestimated demand in South Australia during the evening peak. But his organisation’s lack of concern, in the face of a possible blackout, is still remarkable.    

On February 9, Grattan Institute Energy Program Director Tony Wood summed up the situation: “Both last year (when the state went black) and yesterday, they (AEMO) made a decision and the end result was a choice between cost and security and they chose cost in both cases.”

Market priorities

If the performance of AEMO and the electricity generating companies in this case shows anything, it is that combining (mostly) private ownership with the profit motive is a lousy way to run an electricity grid.

Neoliberal doctrine insists that the energy industry be run on market lines. But by its very nature, the industry is not just a money-making enterprise. It is also a public service, furnishing the life-blood of advanced civilisation.

As a natural monopoly, the energy industry needs to be socially owned and rationally planned, with democratic input from the community. Only in this way can the need for energy security be reconciled with cost-efficient operation.

That much is obvious even to the famously right-wing South Australian Labor Party. Dealt a cruel political blow by the blackout, state Labor ministers in its aftermath began talking like Bolsheviks.

“We have a national electricity market which is all about dollars and cents,” Premier Jay Weatherill said. “It is a trading system where people are trying to maximise profit and minimise cost.”

“We have an oversupply of generation, yet the market is unable to dispatch that electricity,” Treasurer and Energy Minister Tom Koutsantonis said. “That is a massive catastrophic failure.”

AEMO, Koutsantonis charged, was running the electricity system “like a stock market”.

Weatherill has now promised to “intervene dramatically in the energy market”. Specific plans remain under wraps, but are tipped to centre on building more gas-fired peaking capacity.

The real need, however, is for energy storage that can complement the state’s renewable electricity generation.

South Australia has huge resources of wind and solar energy and AEMO estimates that in the past six months 51% of the state’s generation has come from renewables. Once built, renewables produce power extremely cheaply. If this energy can be stored, and fed into the grid at peak times when prices are high, wind and solar have the potential to drive fossil fuels out of the market.

Repower Port Augusta proposes a solar thermal plant with molten salt heat storage for South Australia’s north. Still more promising, arguably, are proposals for pumped hydro storage. According to Melbourne University researcher Dylan McConnell, studies have identified six potential sites for such facilities in South Australia.

Pumped hydro is clean, technically proven, has a round-trip efficiency as high as 80%, and is among the cheapest methods of energy storage. It can be brought on stream within minutes.

The capital cost to South Australia for 1000 megawatt-hours of pumped-hydro storage capacity — 20 times more than the energy shortfall on February 8 — has been put at about $300 million. That is less than the projected cost of a new gas-fired plant.

Backed by such storage technologies, renewable energy is reliable and flexible. The concept of “base load power” becomes redundant.

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