tag:theconversation.com,2011:/columns/mike-sandiford-228Energy and the Earth – The Conversation2017-07-20T04:24:29Ztag:theconversation.com,2011:article/319432017-07-20T04:24:29Z2017-07-20T04:24:29ZOpen season for our notion-building pollies<p>Since the Finkel review was announced it has been open season for <em>notion building</em> in the energy space. While Malcolm has been pumping Snowy 2.zero, Craig has been promising death by renewables, quite literally. Josh seems to be for just about everything, besides Labor state governments of course, and reckons we are on track to meet Paris commitments. Barnaby, true to form, is backing coal, reckoning Paris can take care of itself, while Electricity Bill is <em>keeping mum</em>, knowing it won’t but banking it will.</p>
<p>The one I like the best, but really hasn’t been nailed quite the way I thought it should, is Tony’s call for nuclear subs. Imagine, our first truly dispatchable power system, capable of delivering a few hundred megawatts just about anywhere you need it. Defending the grid with <em>RANpower float and plug technology</em>, just what we need to shore up our fragile energy system. A tour of dispatch last year including Tasmania from January through June, South Australia June through November, and then on to Queensland for the summer would have been a nice little money spinner for the Navy, worth around quarter of a billion dollars on the energy markets. And that doesn’t include offsets, such as the purported <a href="https://theconversation.com/a-new-normal-as-basslink-finally-resumes-61195">$44 million Tasmanian government spent on diesel gensets</a>. Could it be our best notion yet for meeting Paris? </p>
<p>It goes without saying that our political masters don’t need much provocation to indulge in a bit of notion building. After all, it is what they do best. </p>
<p>But, in case you are wondering why this sudden release of energy, it might be useful to reflect on some recent analyses that paint a truly disturbing picture for our energy sector. </p>
<p>The first comes from the <a href="https://ec.europa.eu/energy/sites/ener/files/documents/quarterly_report_on_european_electricity_markets_q1_2017.pdf">European Commission’s latest electricity market update</a> providing the comparison of wholesale electricity prices shown below.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178931/original/file-20170719-13534-1218g46.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">International wholesale prices as adapted from Figure 33 in the European Commission’s Quarterly report on European electricity markets Q1 2017. Average prices for the 4th quarter of 2014, 3rd quarter 2015, and the first quarter of 2017, are referenced as a percentage of Australian prices.</span>
<span class="attribution"><span class="source">Figure 33, Quarterly report on European electricity markets Q1 2017, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly_report_on_european_electricity_markets_q1_2017.pdf</span></span>
</figcaption>
</figure>
<p>As recently as three years ago our electricity wholesale prices were low by any measure. In fact according to the EC’s analysis<br>
our market prices then briefly dipped below those in the US. Then, ours were just 20% of the Japanese price. </p>
<p>How times have changed.</p>
<p>According to the EC’s latest analysis our prices tracked pretty closely with the US until the second half of 2015. It seems things to start going awry just about when Josh received the poison chalice as Minister for Energy and Resources. </p>
<p>Six quarters later and the EC now estimates that for Quarter 1 this year our prices were a staggering 400% higher than in the US. </p>
<p>This last quarter we even managed to top Japan, which is some achievement considering that across the quarter we exported some <a href="https://industry.gov.au/resource/Mining/AustralianMineralCommodities/Documents/Australias-major-export-commodities-coal-fact-sheet.pdf">10 million tonnes of our thermal coal</a> and over half a million tonnes of LNG to help them sure up a power system still reverberating from the shock waves of Fukushima. That’s about ¼ of the thermal coal we used to power our system. </p>
<p>The second comes from <a href="http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html">BP’s latest Statistical Review of World Energy</a> released in June, which provides national figures for all things related to energy production and consumption, including sector wide emissions.</p>
<p>According to BP’s latest figures our energy sector produced about 409 million tonnes of CO2 in 2016. That amounts to 16.7 tonnes for every Australian. On a <em>per capita</em> basis, that puts our energy sector a touch above the next most emissions intensive economy in the developed world - the US at 16.5 tonnes. Even Canada, which has a resource based economy more comparable to our own, gets away with only 14.6 tonnes per person. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178949/original/file-20170720-24026-muvvyu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Trends in <em>per capita</em> emissions for select countries (in tonnes per person), plotted as a function of GDP (in $US purchasing power parity terms). Emission data from BP’s Statistical review of World Energy. GDP and population data from IMF. Time series start in 1981 (on left) and continue to 2016 (on right). Dots show 2009, in the wake of the GFC.</span>
</figcaption>
</figure>
<p>Worryingly, relative to 2005 levels our energy sector emissions are up about 10%, which stands in stark contrast to most other advanced economies, and especially the US, down 12% over the same interval.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178971/original/file-20170720-23980-f0r1y3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">National energy sector emissions for select advanced economies, relative to 2005 levels, using data from BP’s latest Statistical Review of World Energy released in June. Australia’s Paris commitment is to reduce national emissions to 26-28 per cent on 2005 levels by 2030. Note that for Australia energy sector emissions (including transport and power) account for about 2/3 the total emissions.</span>
</figcaption>
</figure>
<p>So the notion that we are on track to meet Paris is, at best, notional. </p>
<p>To achieve such extraordinary wholesale price outcomes, one might imagine something remarkable had happened to our energy system since 2014. Our <em>Coal-cons</em> such as Craig Kelly would believe it is because our power system is groaning under the weight of renewable production.</p>
<p>But maybe it’s the absence of renewables. Or maybe it is both, peskily masked in a cloak of invisibility. Check out the figure below, which shows our electricity production by key fuel group (coal, gas and renewables) over the period since our power prices have risen from the lowest to highest on the international pecking order. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=369&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=369&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=369&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=464&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=464&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178932/original/file-20170719-10632-1kd3wj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=464&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Weekly average production of electricity by three main fuel group types (in gigawatts), dispatched on the National Electricity Market over the last five years. Data sourced from AEMO, using Dylan McConnell’s openNEM. RE (renewables) includes hydro, wind and large scale solar and biomass, but not rooftop PV which is not dispatched onto the market.</span>
</figcaption>
</figure>
<p>Can you determine a trend that could account for anything? I’m damned if I can. </p>
<p>And that in itself is sure to be worry enough to keep it open season on <em>notion building</em> for a long time to come.</p>
<hr>
<p><em>For those interested, some more detailed discussion of the crisis besetting the National Electricity Market (NEM) in eastern Australia can be found in my Anatomy of an Energy Crisis series, <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-1-71789">Part 1</a>, <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-2-65206">Part 2</a> & <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-3-73693">Part 3</a>.</em></p>
<hr>
<h1>Addendum</h1>
<p>In response to some of the discussion I show below the equivalent of the last diagram above, split out into the various regional markets that makeup the mainland portion of the NEM.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=488&fit=crop&dpr=1 600w, https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=488&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=488&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=613&fit=crop&dpr=1 754w, https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=613&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/179097/original/file-20170720-32541-jz3gio.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=613&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Weekly average production of electricity by three main fuel group types (in gigawatts), for each of the four mainland regional markets on the National Electricity Market over the last five years. Data sourced from AEMO, using Dylan McConnell’s openNEM. RE (renewables) includes hydro, wind and large scale solar and biomass, but not rooftop PV which is not dispatched onto the market.</span>
</figcaption>
</figure><img src="https://counter.theconversation.com/content/31943/count.gif" alt="The Conversation" width="1" height="1" />
Since the Finkel review was announced it has been open season for notion building in the energy space. While Malcolm has been pumping Snowy 2.zero, Craig has been promising death by renewables, quite literally…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/736932017-03-15T10:37:54Z2017-03-15T10:37:54ZThe anatomy of an energy crisis - a pictorial guide, Part 3<p><em>In the third in my series on the crisis besetting the National Electricity Market (NEM) in eastern Australia (see <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-1-71789">Part 1</a> & <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-2-65206">Part 2</a>), I look at some evidence for how the market itself has played a role and specifically market power issues.</em></p>
<p>The recent troubles in our electricity market are well documented. As described in my earlier pieces in this series, two elements have focused the attention of our political masters and industry groups.</p>
<p>The first is the question of security, highlighted most dramatically by recent “black outs” in South Australia.</p>
<p>The second is the question of price, with both wholesale and contract market prices having risen dramatically across most regions in recent times but nowhere quite as dramatically as in Queensland (note that retail prices have also been rising as highlighted by the recent <a href="https://grattan.edu.au/report/price-shock/">Grattan report</a>).</p>
<p>As discussed in Part 2, the tightening of the demand-supply balance in Queensland in response to an additional ~800 megawatt load from the massive CSG field developments and LNG export processing facilities <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-2-65206">partly explains the rise in wholesale or pool prices there</a>, but it is far from the full explanation. </p>
<p>Lurking in the details are issues to do with the very functioning of the market, and the exercise of market power by large generators who are able to exploit <a href="https://en.wikipedia.org/wiki/Economic_rent#Monopoly_rent"><em>monopoly rents</em></a>. </p>
<h2>Concentrated power</h2>
<p>As shown below, ownership of generation assets across the NEM is very concentrated. AGL is the dominant player in New South Wales, Victoria and South Australia, while the state owned Stanwell and CS Energy command almost 70% of Queensland generation capacity.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161678/original/image-20170320-9140-i9gvme.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Percentage market share by participating companies in each of the four mainland regions in the NEM. The blue show percentages of both <em>scheduled</em> and <em>semi-scheduled</em> generation, while the red shows percentage share of scheduled generation alone. <em>Semi-scheduled</em> generation includes intermittent generators such as wind generators. The notional value of the HHI, shown in the title of each panel for scheduled plus semi-scheduled generation(left), and for scheduled generation alone (right), is a standard measure of market concentration (note that the up-to-date trading rights for generator outputs are not in the public domain, so the HHI’s may in fact be higher than quoted here). Note that in South Australia the market concentration increases appreciably as wind output declines, while in Victoria it declines marginally. Queensland has no wind generators. Only the five largest generators for each region are shown.</span>
</figcaption>
</figure>
<p>The <a href="https://en.wikipedia.org/wiki/Herfindahl_index">Herfindahl-Hirschman index</a> (HHI) is a commonly used measure of market concentration given by summing the squares of the percentage market shares for all participating firms.
A HHI of 10,000 is equivalent to a 100% share, and represents complete monopoly. A HHI of 2000 is used by the Australian Competition and Consumer Commission (ACCC) to flag competition concerns.
The UK’s Office of Gas and Electricity Markets (OFGEM) regards an HHI exceeding 1000 as concentrated and above 2000 as very concentrated. With a current HHI value of 1243, the OFGEM considers the UK wholesale electricity market somewhat concentrated.</p>
<p>With notional HHI’s in the range ~1800-2600, the regions of the NEM vary between somewhat (VIC1) to very (QLD1) concentrated. Queensland is a particular issue since the two dominant generation entities, Stanwell and CS Energy, are both state-owned. As shown below, aggregating them yields an effective HHI of ~5000, which amounts to extreme market power.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161425/original/image-20170319-6139-dpvodc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Queensland market share, when state owned enterprise (Stanwell and CS Energy) are aggregated. The implied HHI of ~5000 intimates the potential for extreme market power of state-owned assets.</span>
</figcaption>
</figure>
<p>The impact of intermittent wind generation, or <em>semi-scheduled</em> generation in NEM-speak, on market power depends on the structure of assets held by participants. In South Australia the HHI rises in times of low output because AGL holds a relatively minor proportion of that region’s wind assets. Contrawise, it declines in Victoria because AGL holds a much higher proportion of the total wind assets. </p>
<p>Interconnection serves to reduce market power, by allowing more competitive pressure. For example, the 650 MW Heywood interconnector between South Australia and Victoria helps ameliorate market concentration issues. This is especially important for the relatively small market of South Australia, though perhaps not as much as might be possible, given AGL holds the dominant market share in both regions.</p>
<p>As discussed further below, recent and proposed closures of coal fired power stations, such as Alinta’s Northern Power Station in South Australia and Engie’s Hazelwood Power Station in Victoria, have or will effect more concentrated market power.</p>
<h2>A rule change</h2>
<p>As described in the Part 1, the NEM is designed to signal changes in the balance of demand and supply via spot prices. But how much the prices respond is very dependant on the level of competition. </p>
<p>Recent experience of market participants flouting the spirit of the rules shines a light on competition issues and highlights a rather obvious, if somewhat trite, reality. That is, <em>the benefits of competitive markets can only flow if markets are competitive</em>.</p>
<p>The exercise of market power has been a perennial issue in the NEM. It is the role of the Australian Energy Market Commission (AEMC) to set the rules that allow for safe operation of the electricity network, and efficient operation of the market. It is the job of the Australian Energy Regulator (AER) to do the enforcing, while AEMO operates the market.</p>
<p>The AEMC periodically adjusts rules so as to minimise the impact of perceived or real anti-competitive behaviour. It did so most recently in December 2015 with the <em><a href="http://www.aemc.gov.au/Rule-Changes/Bidding-in-Good-Faith">Bidding in Good Faith</a></em> rule amendment because, to quote:</p>
<blockquote>
<p>… The Commission considers that the current rules do not set adequate boundaries on the ability of some participants to influence price outcomes to the detriment of others. This is not reflective of an efficient market.</p>
</blockquote>
<p>The statement “ability … to influence price outcomes” is key. It expresses AEMC’s concern that some participants have sufficient market power to extract so-called <em>monopoly rents</em>.</p>
<p>To fulfil my aim of providing a <em>pictorial guide</em> to the market power issues that motivated the rule amendment, it’s advisable (but probably not essential) to delve into the details of two intervals on which the market operates more so than discussed in <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-1-71789">Part 1</a>. The two intervals are the five minute <em>dispatch interval</em> and the half hour <em>trading interval</em>.</p>
<h2>Some arcane detail</h2>
<p><em>(Warning, do skip to the next section if you would prefer to pass on the detail, as it is technical! It provides the background to why lines should be horizontal on the graphs discussed below, and the significance when they deviate).</em></p>
<p>The five minute <em>dispatch interval</em> is where the physics of the power system (balancing supply and demand in real time) meets the economics of the market (serving demand at minimum cost). Functionally, our energy market operates by pooling offers from generators and allocating dispatch for each five minute interval in order of increasing offer price. </p>
<p>A <em>generator offer</em> specifies the price and quantity of electricity that will be supplied in a given trading interval, if needed. The dispatch price is set by the last (highest-price) offer needed to meet the <em>dispatch interval</em> demand. All generation dispatched receives the same dispatch price, regardless of the offer price. Offers at prices above the dispatch price are not needed and so receive nought. To ensure a slice of action, theory
has it that generators will offer the majority of their capacity at their short run marginal cost, at prices like is shown for Victorian generators in the figure below.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160908/original/image-20170315-5347-1jktfh8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Short run marginal cost of Victorian generators, stacked from left to right in <em>merit order</em> of increasing marginal cost. The x-axis shows the cumulative nameplate capacity of the lowest cost power plants in megawatts. Because renewables such as wind have zero fuel cost they stack on the left side of the merit curve. Gas and diesel generators with high fuel costs stack on the right. Image by Dylan McConnell.</span>
</figcaption>
</figure>
<p>In practice, individual generators apportion their capacity into a range of price bands. They are then allowed to rebid some capacity into different price bands at short notice allowing adjustments to unforeseen circumstances that periodically arise. AEMC’s <em>Bidding in Good Faith</em> rule amendment requires a justification for any late rebidding within 15 minutes of the start of the relevant <em>dispatch interval</em>.</p>
<p>The second interval is the half-hour <em>trading interval</em> or settlement period, across which dispatch prices are averaged to obtain a spot or settlement price, so called because it is the period on which financial payments are settled. </p>
<p>Since demand normally varies only slightly across a given half hour <em>trading interval</em> there should be little difference in the dispatch prices across the six corresponding <em>dispatch intervals</em>, especially when averaged over many such intervals. In an efficient market with generators offering the bulk of their capacity at near their short run cost, this <em>trading interval</em> averaging should not materially affect the financial outcomes of the market. </p>
<p>The figure below provides an illustrative case. It shows the dispatch prices for each dispatch interval averaged across January 2016. The narrow range of variation, and flat trace, meets the expectation of a well functioning market.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160676/original/image-20170314-10741-1yrefd4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average prices for each of the 5 minute <em>dispatch intervals</em> that make up the half hour settlement price for January, 2016. Prices are relatively constant across all intervals as expected in a well-behaved market, trading in an interval of about $10-15 per megawatt hour, for all four regional markets that define the mainland part of the NEM. Note the period is the month following the <em>Bidding in Good Faith</em> rule amendment by the AEMC in December 2015, The good behaviour of the QLD1 market contrasts strongly with the same periods in the previous and following years as shown in the following diagrams.</span>
</figcaption>
</figure>
<p>As revenues are the product of price and demand, their graph should similarly trace a flat line across the dispatch intervals, as it did for January 2016.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161078/original/image-20170316-20805-21cs0p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As for above but showing revenues rather than prices. The lower revenue for SA1 reflects its much smaller dispatch, compared to NSW1, QLD1 and VIC1. The numbers on the right correspond to the total market revenue for the month, and (marked with a +) the anomalous revenue given by the sum of the differences between the dispatch prices and the lowest average dispatch price.</span>
</figcaption>
</figure>
<p>In a deregulated market like the NEM, optimal bidding is ensured primarily by the discipline of competitive forces. By preventing profiteering or gaming, it is that discipline that should ensure the lines in these figures lie flat. It goes without saying, that without adequate competition, there can be no such insurance, and one of the signals can be found when plots like these deviate from horizontal. Then, the only recourse is to impose rules on the market. The period shown in the figures above are for the first month following AEMC’s <em>bidding in good faith</em> rule amendment.</p>
<h2>Why two intervals?</h2>
<p>While the existence of a five-minute <em>dispatch interval</em> is essential to balance demand and supply in real time, there is no compelling reason for the exercise of a half-hour <em>trading interval</em>, it being something of a historical artefact. Interestingly, judging by <a href="http://www.aemc.gov.au/Rule-Changes/Five-Minute-Settlement">submissions</a> to a current proposed rule change that would dispense the <em>trading interval</em>, operators of our large generators seem to love it.</p>
<p>Why so? The cynic would say because the existence of the two intervals affords a convenient guise to engage in profiteering. For example, by rebidding capacity into higher price bands late in a <em>trading interval</em>, pool prices can be raised significantly. While such a material distortion of the market would only immediately impact un-contracted customers trading directly on the wholesale market, as explained in <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-1-71789">Part 1</a> any sustained price impact will pass through the contract markets thereby eventually affecting all customers. </p>
<h2>So where is the evidence?</h2>
<p>Do some participants engage in such profiteering? Well the AEMC certainly thought so, enough at least to amend the <em>Bidding in Good Faith Rule</em> in December 2015. </p>
<p>The AEMC was particularly concerned that such practices were impacting market outcomes in Queensland. The smoking gun lies deeply buried in the gory details of the offers and rebids, as documented in <a href="https://www.aer.gov.au/system/files/State%20of%20the%20energy%20market%202015%20%28A4%20format%29%20%E2%80%93%20last%20updated%204%20February%202016.pdf">AER’s “State of the energy market 2015” report on page 49</a>. But the pointers are quite apparent in the figures below which cover the month of January in 2015, prior to the AEMC’s rule amendment. They show the prices and the revenue by the five minute <em>dispatch interval</em> . The striking feature is the asymmetry in Queensland (QLD1) price and revenue distribution, increasing very substantially across the last two <em>dispatch intervals</em>, compared with the earlier intervals. As explained above, the distribution should be flat, like it is for the other states in January 2015. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161074/original/image-20170316-20784-wp6q71.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average prices for each of the 5 minute <em>dispatch intervals</em> that make up the half hour settlement price for January, 2015. Note the elevated and much more skewed distribution for QLD1, with prices in the last two dispatch intervals much higher than the earlier intervals. Their is no such anomalies in the other states which are operating in accordance with expectation.</span>
</figcaption>
</figure>
<p>A crude estimate of the excess revenue generated by the anomalous market behaviour in Queensland is given by the shaded area in the <em>revenue verse dispatch interval</em> plot below. As noted on the right, it amounted to some 30% of total market value, or ~ $200 million across the month.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161015/original/image-20170315-20514-1o94oxv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average wholesale markets revenues for 5 minute <em>dispatch intervals</em> for January, 2015. The numbers on the right correspond to the total market revenue for the month, and (marked with a +) the anomalous revenue given by the sum of the differences between the dispatch prices and the lowest average dispatch price, shown by the shaded area. The latter is a guide to distortion that can be attributed to noncompetitive market forces - about $200 million, or 30%, for QLD1 in this case.</span>
</figcaption>
</figure>
<p>By these metrics the magnitude of the Queensland anomaly is astounding, amounting to ~150% of the total revenue in the similarly sized Victorian market and adding as much as $40 per megawatt hour to Queensland spot over the month. The AEMC interest in a rule change is hardly surprising. To my mind they were a little conservative. To quote from AEMC’s rule determination:</p>
<blockquote>
<p>… the price volatility that arises from deliberately late rebidding … [is] … estimated to have added around eight dollars per megawatt hour to the price of caps in Queensland in the final quarter of 2014, and around seven dollars per megawatt hour in the first quarter of 2015. Across the market, this represents additional expenditure of approximately $170 million.</p>
</blockquote>
<p>Whatever the final accounting, Queensland customers should have been outraged. In conclusion the AEMC noted </p>
<blockquote>
<p>… While it is not guaranteed that the changes to the rules will put an immediate stop to the conduct of concern, they are a proportionate response to the issue, and ought to make it easier for the AER compared to the current arrangements to take enforcement action in respect of deliberately late rebidding. At the same time, they should not prevent rebidding in legitimate pursuit of commercial interests.</p>
</blockquote>
<p>Should we ask did it do so? </p>
<p>The answer is shown in the figures below, for January 2017. Essentially they are the mirror image of the January 2015 scenario, seemingly implying Queensland generators are now initially bidding in capacity into elevated price bands in the early dispatch intervals. Whatever the strategy it is achieving an almost identical outcome to 2015. Even if entirely within the rules, it would seem not in the spirit. The substantive result is situation normal for Queensland customers, with a $225 million monopoly rent extraction for this past January accompanying <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-2-65206">unprecedented spot price rises</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161073/original/image-20170316-20789-h3zble.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average prices for each of the 5 minute <em>dispatch intervals</em> that make up the half hour settlement price for January, 2017.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161017/original/image-20170315-20501-1wmmxdc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average wholesale markets revenues for 5 minute <em>dispatch intervals</em> for January, 2017. It is notable that it is almost the mirror image of January 2015 shown above, an example of creative compliance by Queensland generators following AMEC’s <em>Bidding in Good Faith</em> rule amendment of December 2015. Note also the almost doubling of January revenues since 2015. The shaded area represents the $225 million monopoly rent extraction foisted in Queensland customers in January. Annualised that amounts to a whopping $2.7 billion.</span>
</figcaption>
</figure>
<h2>Concentrating power</h2>
<p>There is such a lot to be said about this, and hopefully it will be. Queensland customers should be beyond outrage. The analysis provided above is but one, easily illustrated example of the exercise of market power. There are others, as for example described in the notes below [2]. From the perspective of this discussion it is illustrative of significant deficiencies in the current operation of the NEM. Those deficiencies are exacerbating our current energy crisis. A concentration of market power is adding materially to costs especially, but not only, in Queensland.</p>
<p>It is worth noting that the <a href="http://www.aemc.gov.au/Rule-Changes/Five-Minute-Settlement">half-hour settlement period is currently under review by AEMC</a> and, against the wishes of most established operators, will likely be scrapped [1]. Whatever is decided by AEMC, the underlying issue of market power cannot be addressed by tinkering with the rules. The concentration of market power is increasing as old power stations such as Alinta’s Northern Power Station in South Australia and Engie’s Hazelwood Power Station in Victoria are closed. For example, following closure of Northern, AGL’s proportion of registered capacity in South Australia increased 5% points, from 36% to 41%, improving its relative market power by more than 10%. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161669/original/image-20170320-9114-q0t2t8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Percentage of registered generation capacity by participant in South Australia, both before (blue) and after (red) the closure of the Alinta’s Northern Power Station (NPS). Also shown in green is the effect of mothballing Engie’s Pelican Point Power station PPS) as it was in winter 2016. Orange shows the percentages less NPS, PPPS and semi scheduled generators (wind), as applied on July 7th, 2016. In both instances AGL’s relative market power has substantially increased by these events, by over 10% in relative market power terms. This increases the likelihood of AGL being a necessary or <em>pivotal</em> supplier, as it’s was in July 7th in the first of the South Australian energy crises of last year as described briefly in note [2]. Only the largest eight participants are shown.</span>
</figcaption>
</figure>
<p>Following the closure of Northern, as well as the decision by Engie to <em>mothball</em> the Pelican Point Power Station, AGL played its hand ruthlessly during the first of the South Australian energy crises in July 2016 [2]. With the closure of Hazelwood in a few weeks, AGL will again be the beneficiary of increased market share in Victoria. Although not to the extent it was in South Australia, it will increase the likelihood of AGL being a necessary or <em>pivotal</em> supplier in future high demand events in Victoria. How AGL responds will be a key to how steeply prices rise in Victoria and neighbouring states. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/161677/original/image-20170320-9147-2ohiqj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Percentage of registered generation capacity by participant in Victoria ), both before (blue) and after (red) the closure of Engie’s Hazelwood Power Stations (HPS), respectively. Orange shows the percentages less HPS and semi scheduled generators(wind). Note that Hazelwood is still operational at the time of writing, but is scheduled to close at end of this month (March, 2017). AGL’s relative market power will be substantially improved by these closures, by over 10% in relative market power terms. In OFGEM’s terms the Victorian market power increases from <em>somewhat concentrated</em> to <em>exceedingly concentrated</em>. This increases the likelihood of AGL being a necessary or <em>pivotal</em> supplier. Only the largest seven participants are shown.</span>
</figcaption>
</figure>
<h2>Some reflections</h2>
<p>A key objective of the NEM’s <em>energy-only</em> market is to bring competitive pressure to bear on wholesale prices. Until recently the NEM was performing quite well in this regard, with wholesale prices and volatility being very low in the period 2009-2014 in historical terms (see <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-2-65206">Part 2</a>). But this has changed over the last few years, with a tightening of the market. Like with any industry, our electricity generators have shown adeptness at exploiting the opportunities availed by the market rules. Because of the concentrated nature of the market they have been able to influence price outcomes beyond what would be expected for an <em>efficient market</em> response to such tightening. In so doing they are helped provoke the current energy crisis. </p>
<p>One could only wish our generators turned such “adeptness” to helping drive our energy system to a place we need it to be, that is <em>secure, affordable and with much, much lower emissions</em>. To be so guided, our market rules will have to be radically reshaped to be more aligned to the national interest, explicitly including all three elements of our <em>energy trilemma</em>, and ensuring adequate levels of competition allow the benefits of the deregulated market flow to all participants.</p>
<p>Sadly, as our energy crisis has unfolded, partly in response to the need to address its emissions intensity, emissions have begun to rise again. Just by how much we do not know, as I will discuss in the next piece in this series.</p>
<hr>
<p>Notes</p>
<p>[1] As <a href="http://www.aemc.gov.au/getattachment/1d460acc-dbe2-45ea-bb4e-1903161d90f1/Melbourne-Energy-Institute.aspx">Dylan McConnell has shown</a>, the current rules also seriously disadvantage the economics of a number of emerging technologies such as battery storage, hindering innovation that would serve much needed competitive discipline into the market.</p>
<p>[2] For example, on page 51 of its <a href="https://www.aer.gov.au/system/files/State%20of%20the%20energy%20market%202015%20%28A4%20format%29%20%E2%80%93%20last%20updated%204%20February%202016.pdf"> “State of the energy market 2015” report </a>, the AER documents the role of Snowy Hydro’s <em>strategic bidding</em> of its Angaston plant in South Australia on June 10th 2015 to manipulate price. In <a href="http://energy.unimelb.edu.au/library/winds-of-change-an-analysis-of-recent-changes-in-the-south-australian-electricity-market">our analysis</a> of the July 7th event in South Australia, we analysed the extent to which AGL bid capacity to high price bands (typically the market cap price) for the Torrens Island A Power Station. We also looked at the proportion of capacity that was available below and above $300/MWh. In aggregate, Torrens Island A offered its entire capacity to the market at less than $300/MWh 96.5% of time in 2015. For the remaining 3.5% of the year (or about 300 hours) some capacity was pushed into high price bands.
Our analysis shows a correlation between periods of high scheduled demand and Torrens Island A’s bidding of capacity into high price bands. The proportion of time when some capacity was priced above $300/MWh is clearly skewed to times of high scheduled demand. In 2015, for the top 10% of scheduled demand periods, the amount of time some capacity was bid into these high price bands was 16.7%. For the top 1% of scheduled demand periods it increased to 35%. On July 7th 2016, it is clear is that Torrens Island had bid an unusually high volume of capacity at the market price cap, at a time it was needed to ensure supply as a <em>pivotal supplier</em>, consistent with exercising market power. While there is nothing in the rules to prevent this, the lack of appropriate <em>competitive discipline</em> means significant market distortion accumulated.</p><img src="https://counter.theconversation.com/content/73693/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from ANLEC and the ARC. </span></em></p>In the third in my series on the crisis besetting the National Electricity Market (NEM) in eastern Australia (see Part 1 & Part 2), I look at some evidence for how the market itself has played a role…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/743142017-03-10T07:27:03Z2017-03-10T07:27:03ZThe Australian gas market enters the “red zone”, as predicted<h1>“Flabbergas” in Beijing</h1>
<p>The Sichuan basin is one of China’s premier shale gas plays, and when it comes to developing Chinese resources, state-owned enterprises like Sinopec have the inside running. </p>
<p>I met with Sinopec geologists earlier this week in Beijing to discuss collaborations and asked how their Sichuan Basin gas plays were shaping up. I was curious, having been told some years back by a senior Shell shale-gas engineer his view was “too deep and too tight”. After some initial interest, in 2016 <a href="http://royaldutchshellplc.com/2016/04/03/royal-dutch-shell-limiting-investment-in-chinese-shale-gas/">Shell announced</a> it was getting out of the Sichuan. </p>
<p>Somewhat to my surprise, my Sinopec colleagues were very upbeat claiming their shale gas production was on target. With a production schedule targeting some 8000 terajolues per day I wondered aloud, how long they thought they would need Australian LNG exports. They must have sensed some concern and quickly said not to worry. The cost of production from their Sichuan plays was well above the price they were paying for our gas. They wouldn’t be leaving us stranded any time soon, they assured me.</p>
<p>I then told them about the domestic prices here in Australia, where spot prices regularly sit at around $12 per gigajoule and where future contracts are reputedly now being offered at up to $20 gigajoule. Their reaction, in a word, “flabbergasted”. How could it be that we paid more for our own gas than they did to import it? For reference, Henry Hub spot prices in the US are currently settling at around AUD$3.4 per gigajoule, just 30% of the Australian price (AUD$11.4) at the time of writing.</p>
<p>And importing our gas, the Chinese are. Back in 2015, BP reported that China imported around 50 million tonnes in barrels of oil equivalent (BOE) in energy terms, representing about 6000 terajolues per day. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160266/original/image-20170310-3703-1it1bbg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Chinese gas production and consumption figures as terms of Million of barrels of oil equivalent per year, until end of 2015. Data from the BP Statistical Review of World Energy, 2016. While production has risen sharply, more than doubling in the last decade, consumption has risen much faster with a separation occurred around 2008. Consumption outstripped production by about 50 million tonnes in 2015, the equivalent of 7000 terajolues per day. Eastern Australian gas exported via the Gladstone ports will make a significant contribution to Chinese imports into the future, because the marginal cost of production in China’s frontier unconventional basins such as the Sichuan is above the price they pay to import.</span>
</figcaption>
</figure>
<p>The Gladstone Port Authority reported a touch under one million tonnes of LNG left Curtis Island in Queensland bound for China last December. That amounts to a daily rate of about 1600 terajolues. In total, Curtis island shipped 1.7 million tonnes in 27 cargoes in December, equating to about 3000 terajolues per day. That represented around 70% of the total production of 4200 terajolues per day from all the gas fields across eastern and southern Australia that are physically connected to the export facilities. The exports outstripped our domestic consumption in the eastern states by a factor of about 2.5. </p>
<p>The point is worth reiterating. In December last year more gas was shipped to China from Queensland than was used locally across the four eastern sea- board states and South Australia. That wouldn’t be a problem if there was enough gas to go round. But there is not, and instead we have entered the “red zone”.</p>
<h1>Into the “red zone”</h1>
<p>With the first shipments leaving Gladstone just a touch over two years ago, in January 2015, it is hardly surprising that the gas market is causing ructions here in Australia. In fact it shouldn’t surprise anyone as problems were anticipated as far back as 2013, as I discussed in a post mid last year titled “<a href="https://theconversation.com/we-really-must-talk-about-gas-64213">We really must talk about gas</a>”.</p>
<p>And so it would seem we are now really talking about gas.</p>
<p>As illustrated in the figure below, the last few years have witnessed an unprecedented change in our eastern gas market. Production has risen 250% in just two years, from an average of 1800 terajolues per day in the last half of 2014 through to 4600 terajolues per day in last half of 2016.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=420&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=420&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=420&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=528&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=528&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160278/original/image-20170310-20473-v1h7hu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=528&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Total production from the gas fields serving the eastern Australian gas market, coloured by producing region, along with the monthly averaged exports from Gladstone. Production data from AEMO, export data from Gladstone Port Authority.</span>
</figcaption>
</figure>
<p>Also shown is exported gas, and the amount of gas used to deliver gas from the producing fields to the export facilities. The amount of additional gas needed for processing is a somewhat uncertain number but is likely to be more than 10%. In the figure above I assume 12%. Finally, I also show the contracted position of our LNG exporters who are ramping up to around 24 million tonnes of LNG exports per year (CLE), with an assumed additional load of almost 3 million tonnes needed to deliver that to the cargo (marked as “CLE+proc”).</p>
<p>So how does the figure above help us understand what has happened to so dramatically upset our gas markets here in Australia.</p>
<p>Firstly, note how our exports have tracked upwards more steeply than the production from our developing coal-seam gas fields in Queensland from the production region of Roma (shown in green). In the last few months the combination of exports plus the new processing load has begun to outstrip the total production from the new CSG-fields. Production from our older, traditional gas fields such as the Gippsland Basin in Victoria (in red) and the Cooper Basin in South Australia (in dark blue) is being partially used to fill the export cargoes. In short, we are short on gas, having entered the “red zone”.</p>
<p>In a <a href="https://theconversation.com/we-really-must-talk-about-gas-64213">previous post</a>I have discussed the recent dynamics of gas pricing and availability in the National electricity market and its impact on prices, showing how quick we have switched from the “ramp-gas phase”. That is the stage when CSG fields were being developed prior to the completion of the export facilities, providing abundant flows of cheap gas for the local market. Now we are in the “scarce-gas” phase, or the “red-zone” as I like to call it. It is one of the key reasons for the recent doubling of spot electricity prices (another is the extra electricity demand from the LNG processing themselves, providing a double whammy for electricity users, as <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-2-65206">explained here</a>). But scarcity pricing in the gas market is affecting all users, not just electricity generators.</p>
<p>And the reality is that now we are in the “red-zone” scarcity pricing is here to stay. In the medium-term it only seems likely to get worse. If no new production is bought to market, exports rise to meet contracts, and around 12% of additional gas is needed for export processing, then we we will be excising traditional resources to the export market at a rate of about 400 terajolues per day or about 30% of what would otherwise have been available for domestic use. While there remain many “ifs” in that scenario, it is a hugely worrying shift in the balance of demand and supply.</p>
<p>With politicians now scurrying to address the situation it is worth reflecting why has it taken so long to do so. It is not as though it wasn’t predicted. To quote from <a href="https://theconversation.com/we-really-must-talk-about-gas-64213">that earlier piece of mine</a> - developing the new CSG fields at such scale was always going to risk that production would fall short of targets. As much was acknowledged by the 2013 Department of Industry and Bureau of Resources and Energy Economics study into <a href="http://www.industry.gov.au/Energy/EnergyMarkets/Documents/EasternAustralianDomesticGasMarketStudy.pdf">Eastern Australian gas markets</a></p>
<blockquote>
<p>The current development of LNG in eastern Australia and the expected tripling of gas demand are creating conditions that are in stark contrast to those in the previously isolated domestic gas market. The timely development of gas resources will be important to ensure that supply is available for domestic gas users and to meet LNG export commitments. Such is the scale of the LNG projects that even small deviations from the CSG reserve development schedule could result in significant volumes of gas being sourced from traditional domestic market supplies</p>
</blockquote>
<p>That was some two years before the first LNG exports. Now some four years on and it is patently clear that Eastern Australia is short on gas, given the existing export contracts. While new conventional fields such as Kipper in the Gipplsand Basin are coming on stream (often with a hefty load of CO2 to complicate matters), existing fields are depleting.</p>
<p>To remedy the situation, there will be predictable calls such as for gas reservation (<a href="https://theconversation.com/we-really-must-talk-about-gas-64213">including by myself</a>), and new exploration, including the lifting of on-shore moratoriums. The demand side needs urgent attention [1]. All should be considered from a rational perspective, since the situation is urgent. But it should be eyes-wide-open, as all have problems and each will face stiff opposition.</p>
<p>No doubt, new production from unconventional resources such as shale and tight gas might alleviate the scarcity pricing events we are witnessing as we now enter the “red zone”, but it will not return us to the halcyon days to times past. Developing new unconventional gas fields is generally proving expensive. Just ask the Chinese. It is after all why they will continue to import our gas. The exception is the US, and that’s because US shale gas rides on the back of the US shale oil. Unconventional gas with liquids is a whole different ballgame.</p>
<hr>
<p>Notes</p>
<p>[1] As commented by Tim Forcey below, the calls must include demand side options. For example the promotion of gas for domestic heating is an anathema in days when heat pumps with high COP, such as modern reverse cycle air conditioners, can harvest many times the energy from the environment (ie. renewable) as goes in via the power socket. The COP (or Coefficient of Performance), which measures the ratio of energy output from the condenser against the power supplied to the compressor, can be as high as seven for a good system.</p><img src="https://counter.theconversation.com/content/74314/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from ANLEC and from the ARC. </span></em></p>“Flabbergas” in Beijing The Sichuan basin is one of China’s premier shale gas plays, and when it comes to developing Chinese resources, state-owned enterprises like Sinopec have the inside running. I met…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/652062017-02-20T09:37:10Z2017-02-20T09:37:10ZThe anatomy of an energy crisis – a pictorial guide, Part 2<p><em>In the second in <a href="https://theconversation.com/the-anatomy-of-an-energy-crisis-a-pictorial-guide-part-1-71789">my series on the crisis besetting the National Electricity Market (NEM) in eastern Australia</a>, I look at the tightening balance of supply and demand.</em></p>
<p>Australia’s NEM is witnessing an unprecedented rise in spot, or wholesale, prices as market conditions tighten in response to a range of factors. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157478/original/image-20170220-15917-3fxfb0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Volume-weighted NEM spot prices by season from 2005 on. Note the extreme prices for the summer of 2017.</span>
</figcaption>
</figure>
<p>As shown above, spot prices are typically highest in summer, due in large part to the way extreme heat waves stretch demand. The historical summer average across the NEM is around $50/MWhour. As recently as 2012, summer prices were as low as $30/MWhour. With only a few days to go in the 2017 summer, prices are averaging a staggering $120/MWhour on a volume-weighted basis. Many factors have played a role, including hot weather, and the drivers vary from state to state. </p>
<p>In South Australia, the high prices have been accompanied by a series of rolling black-outs culminating on 8th February. Spot prices are more than twice last summer, on a volume-weighted basis, and three times the summer before that. Volatility has increased markedly, as evidenced by the way the volume-weighted price has diverged from the averaged spot price. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157410/original/image-20170219-10193-1e91qgv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average spot prices (RRP) , and volume-weighted prices (VWP) for the Summer quarter in South Australia since 2000. The VWP’s, shown in the lighter shades, are higher than the RRP’s, because periods of high spot price generally correlated with increased volumes associated with high demand events. The difference in the VWP and RRP is a measure of the price volatility, which has increased from negligible in the summer of 2012 to significant in the summer of 2017. Note for 2017, the data extend only up to February 18th, the time of writing. Note also that in the summers of 2013 and 2014, the carbon tax applied at the wholesale level. In tat period, the effective price for a coal generator like to Northern was reduced by around $20/MWhour relative the market prices.</span>
</figcaption>
</figure>
<p>But the price rises and security issues have not been restricted to South Australia, with Queensland and New South Wales experiencing steeper rises in percentage terms. Current Queensland volume-weighted prices are averaging $200/MWhour, some 300% above the long-term summer average. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157435/original/image-20170219-10190-1mhtnai.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average spot prices (RRP), and volume-weighted prices (VWP) in lighter shades, for the summer quarter in Queensland since 2000.</span>
</figcaption>
</figure>
<p>On the 12th February new demand records were set in Queensland, with prices averaging $700/MWhour across the day. New South Wales narrowly averted load shedding on 10th February as temperatures and spot prices soared. So far, the exception has been Victoria, where summer prices have remain relatively subdued, at levels not far above the recent average.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157409/original/image-20170219-10223-dcue1l.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average spot prices (RRP), and volume weighted prices (VWP) for the summer quarter in the four mainland regions in the NEM from 2012 on.</span>
</figcaption>
</figure>
<h1>Demand and temperature</h1>
<p>Demand for electrical power varies over a range of time-scales, from daily, weekly to seasonal, as well as with longer-term economic trends.<br>
A key determinant in how much power is needed on any given day is the maximum daily temperature. As shown below, the maximum daily demand marks out a characteristic boomerang shape when plotted against maximum daily temperature. The boomerang bottoms out at temperatures of around 25°C when air conditioning loads are at a minimum. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157415/original/image-20170219-10190-1e9txue.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Boomerang pattern of maximum daily demand in South Australia and maximum daily temperature in Adelaide, by financial year (FY13-14 through FY16-17). Data sourced from the Bureau of Meteorology and from AEMO. Days with average spot prices above $500/MWhour (or about 10 times the NEM average) are identified by larger dots and are encircled. Recent days of exceptional spots prices across the NEM are also highlighted. The figures discriminate between weekdays and weekend, and exclude the Christmas - New Year period, where demand deviates from normal because of low industrial, commercial and public sector loads.</span>
</figcaption>
</figure>
<p>As illustrated above, demand increases significantly in response to heating loads as the weather cools below 20°C and cooling loads as the weather warms above 30°C.
The difference in demand across the weather cycles can be substantial. For example, in South Australia the maximum daily demand varies from around 1500 megawatts on a day with a maximum temperature of 25°C to around 3000 megawatts during heatwaves when the temperatures exceed 40°C. With minimum daily loads under 1000 megawatts, this implies well over half the generation capacity in South Australia is for peaking demand, with much of it sitting idle most of the time waiting for extreme hot weather events. In an energy-only market like the NEM, such peaking capacity demands extreme pricing accompany its dispatch in order to recoup costs. In reality, to manage risks such capacity is normally hedged at a cap-contract of around $300/MWhour.</p>
<p>Similar patterns apply in other states, although in percentage terms the range is less severe. In Queensland the increase between 25 and extreme degree days, which top out at about 37°C in Brisbane, is about 2000 megawatts or approx 30%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157405/original/image-20170218-10217-7vo3e2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Boomerang pattern of maximum daily demand in Queensland and maximum daily temperature in Brisbane, by financial year (FY13-14 through FY16-17). Note the extreme conditions on Sunday 12th February.</span>
</figcaption>
</figure>
<p>A comparison of the figures above show some subtle but important differences in the South Australia and Queensland markets. Notably, the diagrams show that annual demand in Queensland has been rising progressively over the last four years, while it has been static in South Australia. The extreme weather of Sunday 12th February set a new demand record in Queensland, and well above any previous weekend day. In contrast, the 8th February peak in South Australia was lower than previous peaks. To understand why spot prices spiked to similar levels in the different regions requires a deeper dive into the local market conditions.</p>
<h1>South Australian market dynamics</h1>
<p>One reason for seasonal variability in prices is the natural variability in weather conditions, and particularly the frequency and intensity of heat waves. As illustrated below, the 2017 summer in Adelaide has been rather normal in terms of weather extremes, so far with only six days above 40°C compared to seven last summer and thirteen in the 2014 summer. To date, the mean maximum is around 29.7°C , more-or-less spot on the average over the last five years. As such weather variability would not seem to be the key factor driving the recent dramatic rise in spot prices.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157475/original/image-20170220-15894-rqz0mr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proportional distribution of daily maximum temperatures in Adelaide (Kent Town) for the summer quarter, coloured by year. The even spread for the 2017 summer implies temperatures have been in no way abnormal in terms of recent history. Data sourced from the Bureau of Meterology.</span>
</figcaption>
</figure>
<p>The most significant change in the South Australian market last year was the <a href="https://theconversation.com/goodbye-northern-lights-hello-sunlight-58219">closure in May of its last coal fired-power plant</a> - Alinta’s 520 megawatt capacity Northern Power Station. Along with questions about long-term coal supply, Alinta’s decision to close had a lot to do with the low spot prices back in 2015.</p>
<p>Back then, spot prices were suppressed on the back of a fall in both domestic and industrial demand as well as the addition of new wind farms into the supply mix. As shown below, the rapid uptake of solar PV in South Australia had impacted the demand for grid based services, especially during summer, limiting price volatility, and affecting generator revenue streams via a lowering of forward contract prices. In combination, the conditions made for a significant excess in generating capacity, or <em>capacity overhang</em>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157412/original/image-20170219-10228-1md579t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The plot of averaged demand by time of day, for the summer quarter, helps illustrate the way the uptake of domestic solar PV has impacted demand for grid base electricity, reducing midday demand by ~ 30% (~500 megawatts) on average. Note that as shown below, the demand of peak days is much higher, approaching 3000 megawatts.</span>
</figcaption>
</figure>
<p>Despite the falling average demand, and a changing load distribution, the peak demand during the recent heat wave reached above 3045 megawatts in the early evening of 8th February (at 6 pm Eastern Australian Standard Time). That was 340 megawatts lower than the all time South Australian peak of 3385 megawatts for South Australia on the 31st January 2011. The peak on February 8th was accompanied by a spot price of $13160/MWhour.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157413/original/image-20170219-10217-7qw7ee.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As for above, but also showing the demand profile for the extreme day of 8 February, 2017 (black dashed line), when South Australia suffered rolling black outs due to load shedding, and the all time high (red dashed line).</span>
</figcaption>
</figure>
<p>With the closure of Northern, any comparison with previous peak demand events should factor in any demand previously served by Northern Power Station. Before its closure Northern contributed around 420 megawatts power on average over the summer months. Without that supply available this year, the February 8th peak effectively exceeded the previous peak by around 80 megawatts in adjusted terms.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157443/original/image-20170219-10195-8fnxwo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Relative or adjusted peak demand records for South Australia, accounting for the load served by Northern Power Station prior to its closure prior to May 2016.</span>
</figcaption>
</figure>
<h1>Queensland market dynamics</h1>
<p>Queensland has experienced a hot summer with the maximum daily temperature in Brisbane reaching 37°C for the first time since 2014, and an average daily maximum of 31.2°C (at the time of writing). That is about one degree above the average of recent years. However, with only four days with a maximum temperature above 35°C, compared to five in the summer of 2015, weather effects seem unlikely to fully account for the extraordinary rise in spot prices this summer.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157476/original/image-20170220-15922-1eu3riq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proportional distribution of daily maximum temperatures in Brisbane for the summer quarter, coloured by year. The skew in the 2017 summer implies slightly hotter than normal conditions. Data sourced from the Bureau of Meteorology.</span>
</figcaption>
</figure>
<p>In detail the Queensland market differs from other regions in the NEM in as much as it is the only region to have experienced significant demand growth in recent years. Mapping the change of demand growth over the years, by time of day, helps reveal the drivers for market tightening, as shown below firstly in absolute terms, and then in relative terms normalised against 2014.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157448/original/image-20170220-15900-1rxxvis.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Queensland demand loads in megawatts by time of day for the summer quarter, for select years from 2010 to 2017.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157449/original/image-20170220-15879-166u71o.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Queensland demand anomalies in megawatts by time of day for the summer quarter, normalised against the summer quarter of 2014.</span>
</figcaption>
</figure>
<p>Between 2009 and 2014, summer demand fell by about 400 megawatts (or 6%), with the greatest change occurring in the middle of day. This pattern is akin to the signal in South Australia shown above, and reflects how the growing deployment of domestic rooftop PV was revealed to the market as a demand reduction.</p>
<p>Since, 2014 summer demand has grown appreciably across all times of day, skewed somewhat towards the evening. Relative to 2014, demand is up by almost 800 megawatts across the board, and by as much as 1200 megawatts at 8 pm. The ~800 megawatt base increase in demand can be attributed in large part to new industrial loads associated with the commissioning of the LNG export gas processing facilities at Curtis Island. </p>
<p>In terms of extreme events, it is notable that February 12th this year set a new Queensland demand record at 5.30 pm of 9368 megawatts (at the half hour settlement period) with a spot price of $9005. This is extraordinary given it was a Sunday, a day which normally sees demand down several percentage points on corresponding weekdays with similar temperature conditions. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157447/original/image-20170220-15922-1m1x6tw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Peak demand characteristics in Queensland highlighting the events of February 12th, when a new peak demand record was set at the 5.30 pm half hour settlement period.</span>
</figcaption>
</figure>
<h1>What’s different about Victoria?</h1>
<p>Victoria is the exception to the trend of rising spot prices, with the summer prices of 2017 not much above long term average. In part, the relatively subdued prices can be attributed to the absence of
extreme heat in southern Victoria so far this summer. The mean maximum daily summer temperature in Melbourne stands at about 27°C, slightly below average of the previous five years. So far there have been no days with temperatures above 40°C, compared to eight in 2014 and four in 2016. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157485/original/image-20170220-15894-lb22ky.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proportional distribution of daily maximum temperatures at Melbourne Airport for the summer quarter, coloured by year. Data sourced from the Bureau of Meteorology.</span>
</figcaption>
</figure>
<p>The dominant factor in subduing the Victorian markets prices is likely to be the ongoing fall in demand. In the year to 18th February, demand in Victoria fell by 200 MW. This follows a persistent reduction in demand that has seen a fall of almost 500 megawatts over the last three years, equivalent to 9% of average demand. As shown below, the contrast with Queensland is stark, and reflects significant reductions in industrial demand stemming from the closure of the Point Henry aluminium smelter in August 2014 (Point Henry consumed up to 360 megawatts) and more recently the reduced demand from the Portland smelter on the back of damage caused by an unscheduled power outage on December 1st, 2016. While power capacity in Victoria was reduced by the closure of the 150 megawatt Anglesea coal-fired power plant in August 2015, the cumulative demand reduction over the last decade has led to substantial <em>capacity overhang</em>. All that is set to change with the closure of the 1600 megawatt Hazelwood power station, slated for the end of March. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157483/original/image-20170220-15892-23ptzi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average demand for the year ending February 18th for Victoria coloured in blue and Queensland coloured in maroon. demand.</span>
</figcaption>
</figure>
<h1>Some emerging issues</h1>
<p>The figures shown in the previous sections reveal that peak demand events are stretching the power capacity of the NEM in unprecedented ways, for a variety of reasons. The tightening in the demand-supply balance is driving steep price rises that, if sustained, will have widespread repercussions. For example, a $20/MWhour rise in the Queensland spot price translates to a notional annual market value of $1 billion, that must eventually flow through the contract markets. With summer prices already more than $100/MWhour above last year, the additional costs to be passed onto energy consumers may well tally in the many billions of dollars. </p>
<p>In South Australia, the market tightening follows substantially the reduced supply stemming from the closure of the Northern Power Station. </p>
<p>In Queensland, the market tightening is being driven substantially by industrial loads such as the new LNG gas processing facilities. To the extent that the LNG industry is a significant driver, it is a heavy excise to pay for the privilege of exporting our gas resource. The makings for a policy nightmare, should the royalties from our LNG export be outweighed by the cumulative cost impacts passed on via our electricity markets.</p>
<p>It is important to note that the electricity market is designed so that prices fluctuate significantly in response to the normal capacity cycle, as capacity is added to or removed from the market following rises and falls in demand. In small markets, such as South Australia, the spot price fluctuations over the <em>capacity cycle</em> can be extreme, because the capacity of an individual large power plants can represent a large proportion of the native demand. </p>
<p>Although not large in terms of total capacity by Australian standards, Northern’s 520 megawatt power rating represented around 40% of the South Australia’s median demand. That made Northern one of the Australia’s most significant power stations in terms of its <em>regional basis size</em>. Its withdrawal has dramatically and abruptly reduced the <em>capacity overhang</em> in South Australia. Spot prices were always going to rise as a consequence, because that is the way the market was designed. In addition, Northern’s closure has also increased South Australia’s reliance on gas generation, and it has concentrated market power in the hands of remaining generators, <a href="https://theconversation.com/arriums-requiem-and-the-events-of-july-7th-34275">both of which have had additional price impacts</a> beyond the normal market tightening. </p>
<p>In both Queensland and South Australia, the rises in spot prices is signalling the growing tightness in the market. Under normal circumstances that should serve to drive investment in new capacity. The lessons of Northern show that any new capacity in South Australia will need to be responsive to the changing pattern of demand, unless the market rules are changed. </p>
<p>Further, both regions have questions about the adequacy of competition. Both are sensitive to the impacts of parallel developments in the gas markets, which have made gas-fired power production much more expensive in recent times. In the case of Queensland this is greatly exacerbated by the extra demand from the LNG gas production facilities.<br>
Finally, these insights have importance for predicting how the markets the will react to the impending close of the 1600 megawatt Hazelwood Power Station in Victoria, all topics I hope to consider in following posts in this series.</p><img src="https://counter.theconversation.com/content/65206/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from the Australian Research Council and ANLECR&D (Australian National Low Emissions Coal Research & Development).</span></em></p>In the second in my series on the crisis besetting the National Electricity Market (NEM) in eastern Australia, I look at the tightening balance of supply and demand. Australia’s NEM is witnessing an unprecedented…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/717892017-02-13T00:15:47Z2017-02-13T00:15:47ZThe anatomy of an energy crisis - a pictorial guide, Part 1<h1>What energy crisis?</h1>
<p>Who could forget the energy “crises” that affected electricity supply across south-eastern Australia last year. </p>
<p>Firstly the <a href="https://theconversation.com/a-new-normal-as-basslink-finally-resumes-61195">Tasmanian crisis</a>, following the Basslink outage in December 2015. With hydro storage dams at record lows following a <a href="https://theconversation.com/praying-for-rain-50085">drought on the back of aggressive storage withdrawals during the carbon tax years</a>, Tasmania enforced drastic measures to ensure supply. Thankfully, flooding winter rains, together with the eventual restoration of Basslink in June helped resuscitate the apple isle’s energy supply. Tasmania’s hydro storages now stand at around 40% of full capacity, more than double at the same time last year. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156441/original/image-20170211-23354-ci30zi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Tasmanian hydropower storage capacity shows a strong seasonal trend, filling in winter rains, and drawing down during the summer and early autumn. Exchanges with Victoria via Basslink help provide security of supply, that was compromised by the outage in December 2015, when storages were already dangerously low on the back of the drought conditions in 2015 and aggressive draw down of storages during the Carbon-tax years to capitilise on the higher mainland spot prices.</span>
</figcaption>
</figure>
<p>July saw the first of the sequence of crises in South Australia that followed from, and were in many eyes attributable to, the closure of its <a href="https://theconversation.com/goodbye-northern-lights-hello-sunlight-58219">last coal-fired power plant at Port Augusta in May of 2016</a>.</p>
<p>With gas prices at record highs, and South Australia effectively isolated from Victoria due to upgrades on the main interconnector into Victoria, spot prices sky rocketed, culminating on a <a href="https://theconversation.com/arriums-requiem-and-the-events-of-july-7th-34275">cold, windless winter day on July 7th</a>. Energy consumers that had not contracted supply were at the whims of traders. Prices averaged over $1400/MWhour for the day and around $520/MWhour for the week, almost 800% above the average for that time of year.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156442/original/image-20170211-23347-17gepyr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Graphical summary of electrical power generation, demand, spot prices in, and exchange between, each of the five regions comprising the National Electricty Market. The period shown is the week of July 3rd- 9th, 2016, during the first South Australian energy crisis. Over the week, interconnector flows from Victoria into South Australia were restricted to an average of 225 MW, or about 40% of full capacity due to upgrade works. On July 7th, at the height of the crisis, the flow was limited to 166 MW. VWP = volume weighted price in $/MWhour. TOTAL.DEMAND = regional demand in MW. DISPATCH.GEN = regional generation in MW. NETINTERCHANE = net exports (positive) or imports (negative) in MW.</span>
</figcaption>
</figure>
<p>All that was superseded by the events of September, when extreme winds played havoc with the South Australian transmission system, toppling transmission lines in the mid north. Poorly understood default control settings automatically disconnected wind farms, leading to the interconnector tripping and a state-wide black out. Unanticipated problems in restarting the system exacerbated the pain.</p>
<p>Finally, failure of a transmission line in south-west Victoria on December 1 lead to a power loss at the aluminium smelter in Portland. The damage to “frozen” pot lines has jeopardised the smelter’s ongoing viability. As the state’s largest energy consumer and the one of the biggest regional employers, the political fallout is intense.</p>
<h1>After the NEM’s “annus horibilus”</h1>
<p>With 2016 very much the National Electricity Market’s (NEM) “annus horibilus”, pundits awaited the summer of 2017 with bated breath. The combination of high gas prices, frighteningly intense summer heat, a fragile and ageing energy supply system, and increasing concerns about market rules, the scene was set for “interesting times”. Whatever was to transpire it was always going to be inflamed by political point-scoring - the one commodity that seems rarely in short supply. </p>
<p>And so it would prove to be, even in the northern states of Queensland and New South Wales that had hither-too largely escaped the wrath of Electryone. </p>
<p>The summer of 2017 has seen extraordinary rises in spot prices beset the NEM, particularly in New South Wales and Queensland. Further blackouts in South Australia, and market interventions to avert them in New South Wales, have done little to assuage concern if our electrical power system is fit for purpose. So far, 2017 Queensland spot prices have been around 400% above the historical average for this time of year.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156446/original/image-20170212-23354-epkck6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Graphical summary of NEM operations for the period 1st January - 11th February 2017.</span>
</figcaption>
</figure>
<p>With the summer far from finished, our politicians remain hard at it, pointing fingers and apportioning blame, doing almost anything and everything but that which is in most short supply - namely, embracing <a href="https://theconversation.com/electricity-prices-the-election-agenda-and-the-case-for-bipartisanship-61297">bipartisanship</a>.
A glimmer of hope is to be found in comments from Chief Scientist Alan Finkel, who has been charged to lead a <a href="http://www.environment.gov.au/energy/national-electricity-market-review">review of the security of our National Electricity Market</a>. </p>
<h1>What is the NEM?</h1>
<p>To provide some guide to what is happening to the <a href="https://www.aemo.com.au/Electricity/National-Electricity-Market-NEM">NEM</a>, and why, I have compiled a few pictures that illustrate elements its basic anatomy. This is designed as background. In following posts in this series I will focus on the details of recent events that have so heightened the political heat. </p>
<p>The NEM comprises five interconnected regional jurisdictions - one for each state along the eastern seaboard and South Australia. For each region, the market operator <a href="https://www.aemo.com.au">AEMO</a> runs a 5-minute interval, energy-only, dispatch ‘pool’, or spot market. The objective is to balance supply with demand in a way that minimises cost, based on the bids submitted by generators. It is a complicated process. Settlement prices are aggregated at half hourly intervals, and determined as the average of bid prices of the last offer needed to meet the demand for the dispatch interval. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156479/original/image-20170212-23324-xgwefd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Pictorial of the generation structure on the NEM, as of early 2017. The top half shows the five regions comprising the NEM, the bottom half the power as generated and dispatched by fuel type progressing from fossil on the left through to renewables of the right. For the period shown (1/1/2017-11/2/2017) black coal contributed 55.6% of supply (at a capacity factor of 68%), brown coal 22.7% (cf=79%), natural gas 11% (cf = 24%), hydro 5.4% (cf = 14%) and Wind 4.6% (cf=29%) Units are in MW. Note that gas is the only fuel source common to all regions, but its contribution varies significantly from over 50% in South Australia, to just a few percent in Victoria. It is important to note that the small-scale distributed solar PV on domestic rooftops is not dispatched to the NEM and so is not included in this graphic. The installed capacity of around 5 GW of small scale solar PV contributed about an average of 700-800 MW across 2016.</span>
</figcaption>
</figure>
<p>With the focus of the dispatch ‘pool’ being least cost electricity supply,
AEMO also operates several ancillary markets to ensure the requirements for safe grid operation are met. This includes the provision of reserve supply and frequency control normally sourced from synchronous generators such as large coal plants. </p>
<p>AEMO also has regulatory powers to intervene in the market by demanding generation be made available in cases when the total bid capacity is insufficient. When demand exceeds total capacity, or if the available capacity cannot be made available in a timely fashion, AEMO can authorise load-shedding, effecting a re-balancing of demand to meet the available generation capacity.</p>
<p>Normally, large electricity consumers will contract power supply via the contract market, rather than directly through the spot market. This insures consumers against the potential for extreme price volatility allowed on the spot market, that can see prices range from between -$1000 and $14,000/MWhour. For comparison, the standard domestic retail tariff is about $250/MWhour or $0.25/kWhour. </p>
<p>The bid strategies of power plants reflect differences in their cost structures and performance characteristics. For example, fuel costs for brown coal generators are very low, but they are best operated at constant load. In contrast gas plants are generally much more rampable, but much higher cost. In Victoria, as a consequence gas is used almost exclusively to meet peaks in demand as illustrated in the three graphics below.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156483/original/image-20170212-23324-1zbgke.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dispatch in Victoria for the period 8/2/2017-10/2/2017, coloured by fuel source. Also shown is the Victorian demand (brown line), available generation bid into the market (top black line), and net exports as negative (bottom black line)</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156480/original/image-20170212-23331-128bxve.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Brown coal power generation in Victoria for the period 8/2/2017-10/2/2017, coloured by power station.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156482/original/image-20170212-23342-1u86pkr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Natural gas generation in Victoria for the period 8/2/2017-10/2/2017, coloured by power station.</span>
</figcaption>
</figure>
<p>Typically a large base-load generator, such as a brown coal plant, will bid much of its capacity into the spot market at their short run cost, to ensure a slice of the action. In contrast peaking power plants will bid at price well above marginal cost, anticipating that they will required only very occasionally. Forward contracts of various kinds help insure revenue streams for base load generators against spot prices below their long-term cost of production, and for peaking plants being available when needed.</p>
<p>Renewables such as wind dispatch at the whims of the weather, and because of negligible short run marginal costs, bid their output at very low prices. As a price taker, wind generation tends to drive spot prices lower, impacting the viability of other generators. As shown below, and to be discussed in more detail in a following posts, the recent events in South Australian dispatch highlights the challenges in the market when wind power output correlates poorly with demand. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156484/original/image-20170212-23342-466hsw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dispatch in South Australia for the period 8/2/2017 through 10/2/2017, coloured by fuel source. Also shown is the South Australian demand (brown line), available generation bid into the market (top black line), and net imports (bottom white line). Black outs on the 8th February occurred when local dispatch curve hit the available generation. At that time here was no more capacity ready to be dispatched, so AEMO instigated load-shedding. (Note that not all capacity in South Australia was bid into the market at this time.)</span>
</figcaption>
</figure>
<p>Finally, rooftop PV is not dispatched onto the grid, but rather is “revealed” to the market as a reduction in demand.</p>
<h1>Why are spot prices rising?</h1>
<p>In theory, the spot market is designed to encourage a competition that ensures prices provide generators with a revenue stream that is linked to their long run marginal cost of production. If prices do depart, competitive market principles should ensure system re-balancing either through investment in new generation or the withdrawal of old. Of course, competition needs to be provided by an adequate diversity in ownership.</p>
<p>And so shifts in the spot prices, signalled via the contract markets, are designed to reflect the balance of demand and supply. The years 2009-2014 were characterised by persistent reductions in demand across the NEM, in part due to growing penetration of solar PV. At the same time, the addition of new wind farms to meet Renewable Energy Target contributed to a growing oversupply in the market, reflected in very subdued spot prices. For example from 2010-2014, Victorian spot prices averaged about $35/MWhour, after factoring out the carbon tax. While that price is above the cost of production for existing Victorian brown coal generators, it would be well nigh impossible to obtain financing for any new large scale generation at prices less than about 2-3 times that. </p>
<p>Since 2014, demand has risen in Queensland due in part to the commissioning of new LNG gas processing facilities at Curtis Island. Reductions in generation capacity in Victoria and South Australia due to closure and/or mothballing of several fossil plants (Anglesea in Victoria and Northern and Pelican Point in South Australia), has significantly tightened the supply-demand balance. Consequently, spot prices are on the rise across the NEM. </p>
<h1>Why do spot prices vary between regions?</h1>
<p>Spot prices averaged about $60/MWhour across last year, but vary somewhat by region and by season.</p>
<p>As shown in diagrams above the make-up of generation in each of the five regions varies considerably, leading to different cost structures. Similarly differences in demand profiles lead naturally to differences in generation fleet. Finally there are differences in market competition. </p>
<p>With limited interconnection capacity, along with differences in regional demand and generation portfolios, occasionally lead to large separation in spot market prices. In times of very high demand during summer heat waves and winter cold snaps, or in times when supply is constrained by infrastructure (power plant or transmission) outages or fuel supply/cost issues, spot prices can be extremely volatile. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=333&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=333&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=333&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=419&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=419&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156445/original/image-20170212-23354-18uffn4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=419&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual variations in spot prices for the period 2nd January through 11th February, for each of the four mainland regions. Red numbers shows the average for the years prior to 2017.</span>
</figcaption>
</figure>
<p>Historically, South Australia has had the highest prices and Victoria the lowest. This reflects the much higher proportion of gas in the generation mix, its larger proportional daily/seasonal cycle between minimum and maximum demand and, arguably, competition issues. As illustrated below, peak demand in South Australia is over 250% higher than the median, compared to around 150% in Queensland. A greater relative proportion of peaking generation capacity means higher average spot prices. Competition is a particular issue in <a href="https://theconversation.com/arriums-requiem-and-the-events-of-july-7th-34275">South Australia</a>, since the closure of the Northern Power Station, as it is in Queensland. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156478/original/image-20170212-23331-63hlpa.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual demand in South Australia and Queensland, in MW in top panel, and as percentage of median demand in bottom panel. Note the recent rise in demand in QLD due in large part to the recent commissioning of LNG plants. The bottom panel highlights the high variability in demand in SA which sees maximum demand reaching up to 2.4 times the median. In comparison QLD peaks only reach about 1.5 times median. The boxes show 25-75 percent quartile ranges with notch at the median. Outliers more than 1.5 times IQR are shown by dots.</span>
</figcaption>
</figure>
<h1>How well suited is our market?</h1>
<p>It is important to realise that while the physical characteristics of any power system are governed by the laws of physics, the market itself is a construct - just one of many ways of matching supply and demand. In particular as an energy-only ‘pool’ , there are questions about how well our NEM is suited to meeting the need of providing a cost effective, secure and environmentally acceptable energy supply. In particular, there is very little incentive for demand side management. Moreover, the power system does not operate in isolation, and needs to be considered with other policy settings in the gas and water markets as well as climate policy. In the following posts in this series I intend to address some of these issues with examples drawn from our recent experience on the NEM.</p><img src="https://counter.theconversation.com/content/71789/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from ARC and ANLEC. </span></em></p>What energy crisis? Who could forget the energy “crises” that affected electricity supply across south-eastern Australia last year. Firstly the Tasmanian crisis, following the Basslink outage in December…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/642132016-09-07T03:26:28Z2016-09-07T03:26:28ZWe really must talk about gas<p>The European Commission’s latest <a href="https://ec.europa.eu/energy/sites/ener/files/documents/quarterly_report_on_european_electricity_markets_q4_2015-q1_2016.pdf">Quarterly report on electricity markets</a> makes sobering reading down under.</p>
<p>Over the last year wholesale electricity prices have been falling just about everywhere across the developed world except here in Australia, where they are skyrocketing.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136644/original/image-20160905-4784-dc7e2p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure 32 from European Commission’s Quarterly report on electricity markets analysing wholesale market price trends to the end of Q1 2016, in Euros per megawatt hour. The Platts PEP is the Pan European Power price index. Note that as recently as early 2015, Australia had the cheapest prices, now it is heading rapidly towards the most expensive.</span>
<span class="attribution"><span class="source">European Commission Quarterly report on electricity markets, see https://ec.europa.eu/energy/sites/ener/files/documents/quarterly_report_on_european_electricity_markets_q4_2015-q1_2016.pdf</span></span>
</figcaption>
</figure>
<p>Australian prices are now above the European average, well above the US and rapidly converging with Japan, which is still recovering from the shock of Fukushima in 2011 when prices rose to over eight times Australian.</p>
<p>With <a href="http://www.japantimes.co.jp/news/2016/08/15/national/ikata-nuclear-plants-no-3-reactor-begins-generating-power/">Japan now reactivating nuclear power production</a>, and Australian LNG exporters putting the squeeze on domestic gas markets, it can be anticipated that Australia will soon be top of the price tree. Indeed, with 2016 Q2 and Q3 Australian prices rising at unprecedented rates, it probably already is.</p>
<p><a href="https://www.themonthly.com.au/issue/2014/july/1404136800/jess-hill/power-corrupts">Combined with exorbitant power distribution costs</a>, the alarming trends highlighted by the EC’s report will be exercising the mind of our new Federal Minister for the Environment and Energy, Josh Frydenberg. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136642/original/image-20160905-4795-zev564.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Comparison of wholesale electricity prices shown in the figure above as percentage of Australian prices. Note logarithmic scale.</span>
<span class="attribution"><span class="source">Data sourced from European Commission's Quarterly report on electricity markets, see https://ec.europa.eu/energy/sites/ener/files/documents/quarterly_report_on_european_electricity_markets_q4_2015-q1_2016.pdf</span></span>
</figcaption>
</figure>
<h2>How fast are Australian prices rising?</h2>
<p>The trends highlighted by the EC’s report are expressed in Euros, so they somewhat obscure local dynamics. In reality, Australian wholesale prices are rising more steeply than ever before, having risen by around 45% over the last year. Prices over the last six months are now higher in aggregate than at any comparable time during the carbon tax period, which added around 50% to wholesale prices in the period 1/07/2012 - 17/07/2014. When the impact of the carbon tax on 2014 prices is removed, prices are up by more than 65% in just 2 years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136578/original/image-20160905-15440-1aqurwb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Wholesale prices averaged by season, on the Australian National Electricity Market (NEM) from spring 2009 through to winter 2016. For the carbon tax period 1/7/2012 through 17/7/2014, filled coloured bars show the prices with the carbon tax component subtracted, assuming an emissions intensity of 0.85 tonnes per megawatt hour. Actual prices for this period are shown by the open lines.</span>
<span class="attribution"><span class="source">Data sourced from AEMO half-hour aggregated price and demand datasets.</span></span>
</figcaption>
</figure>
<p>Compared to the same period one year earlier, wholesale prices have risen across all seasons and all jurisdictions in the last year, excepting summer in Queensland. The rate of increase has risen steadily from the spring 2015 through to the winter 2016. For the winter period of 2016, prices were up by an average by 85% compared to the previous winter, with the increase ranging from 65% in Queensland to 115% in South Australia.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136648/original/image-20160905-4773-vj5ioj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual percentage changes in wholesale electricity prices on the National electricity market. The prices are calculated for the Spring of 2015 through Winter of 2016, compared to the same period one year earlier, for each of the mainland regions comprising the NEM.</span>
<span class="attribution"><span class="source">Data sourced from AEMO half-hour aggregated price and demand datasets.</span></span>
</figcaption>
</figure>
<h2>Why are electricity prices falling everywhere but Australia?</h2>
<p>The reasons for wholesale electricity price falls in Europe and Japan are straightforward. </p>
<p>Both are dependant on imported gas, and with the oil-linked price for gas falling, so too are electricity prices. In the US market, the flood of shale gas greatly exceeds export capacity, so there is a continuing glut of cheap gas [1]. </p>
<p>The story in Australia is quite different. Despite a three fold increase in gas production in the eastern states in the last few years, due to the opening up of new coal seam gas (CSG) fields in Queensland, the domestic market is being squeezed as LNG exporters struggle to meet supply contracts.</p>
<p>In the Australian CSG industry it is an open secret that some exporters agreed punitive clauses in contracts should they fail to fill their LNG trains. Despite strong opposition from former industry champions such as <a href="http://www.adelaidenow.com.au/business/john-elliceflint-has-a-lot-riding-on-santos-bid/news-story/d08eac14995b5cb0d349670b2b74a472">John Ellice-Flint</a>, exporters such as Santos stretched themselves on production by committing to two LNG trains. Now gas is being diverted from domestic markets to avoid industry collapse. The consequence is that Australian gas consumers are increasingly subject to scarcity pricing when domestic prices can rise to many times that which international buyers have contracted for the same gas.</p>
<p>Not surprisingly, steep rises in the cost of gas is causing a reduction in gas use in domestic electricity markets.
In Queensland gas fired power output in the winter of 2016 was down about 250 megawatts or 20% on the year before. Meanwhile black coal generation was up 450 megawatts, with Queensland’s CO2-production from the electricity sector increasing by 5%. </p>
<p>An insight into the impact of the rising cost of gas on our electricity market is provided in the figures below, which show how market prices varied with gas dispatch in Queensland over the winters of 2015 and 2016, respectively. In winter 2015, when gas dispatch averaged 1076 megawatts, there was no correlation between wholesale prices with the amount of gas dispatch, consistent with gas generation being a price taker. Then the average price of electricity was $39.6 per megawatt hour.</p>
<p>By winter 2016, when gas dispatch averaged 833 megawatts, a strong price correlation had established as gas generators increasingly set the price. Average prices had risen to $65.2 per megawatt hour with spot prices increasing almost $100 per megawatt hour for each additional gigawatt of gas dispatch.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136699/original/image-20160906-6121-17g3qi1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Pattern of market prices with gas dispatch in Queensland in winter, 2015. Abundant ramp gas during this period caused electricity prices to decouple from gas use. The grey points represent individual 5-minute dispatch intervals. The violin plots show the distribution of price event for 8 different gas dispatch bins, while the black circles show the means for each of the 8 bins. The red shade shows the linear fit to the 5 minute data.</span>
<span class="attribution"><span class="source">Data sourced form AEMO 5-minute dispatch tables.</span></span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136700/original/image-20160906-6101-mfykbq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Pattern of market prices with gas dispatch in Queensland in winter, 2016. Gas scarcity in the domestic markets during this period meant there electricity prices were strongly coupled to gas use, with prices rising on average $92/MWhour for each additional gigawatt of gas dispatch.</span>
<span class="attribution"><span class="source">Data sourced form AEMO 5-minute dispatch tables.</span></span>
</figcaption>
</figure>
<h2>We really need to talk about gas</h2>
<p>In 2015, the availability of “ramp” gas made Queensland settings somewhat analogous to the US, where cheap gas increasingly fuels electricity generation. By winter 2016 when more LNG export trains had been commissioned, scarcity pricing was manifesting in our domestic gas markets impacting our electricity market big time. </p>
<p>As the EC’s quarterly market report flags, the historical competitive advantage Australia has had as a cheap provider of electricity has been obliterated in a little over a year. And that is without any carbon tax. It is hurting most severely in South Australia which has always been more exposed to gas prices than other states by virtue of its limited coal reserves. </p>
<p>While several compounding factors have played out in extreme electricity price rises in South Australia, <a href="https://theconversation.com/arriums-requiem-and-the-events-of-july-7th-34275">as discussed in my last post</a>, the broader rises across Australia have their underpinnings in the <a href="https://www.climatecouncil.org.au/perfect-storm-report">rising domestic gas market prices</a> as well as contractual arrangements in gas piping. The <em>smoking gun</em> is the recent steep rise in Queensland electricity prices - a market that remains essentially a <em>renewable free</em> zone.</p>
<p>The damaging reality of the situation is highlighted by a recent post
on the <a href="http://forums.whirlpool.net.au/forum-replies.cfm?t=2479676&p=46#r918">tech website Whirlpool</a></p>
<blockquote>
<ul>
<li>“We are a business in SA [South Australia] with high usage (use up to 14MW), on spot pricing since June 1st – and are turning everything off when a spike hits – but the last 5 minute spike was at the end of the half hour pricing cycle (price is averaged in half hour periods). We just chewed through $75,000 worth of power in a half and hour! (we are used to paying $1000). This period while the interconnector is down could effectively burn about 3 years of profits in 4 working days if the forecast prices come to fruition.”</li>
</ul>
</blockquote>
<p>One might ask why such energy users exposed themselves to spot (wholesale) pricing (the norm is via the contract market). Whatever, the cautionary is that 14 MW represents 1% of average South Australian power consumption. Ten such business at threat of going under would be devastating, with potential to reduce South Australian electricity demand by 10%.</p>
<h2>The horse has bolted, so what next?</h2>
<p>The EC’s quarterly market report was already flagging in Q1 2016 that Australian electricity production was expensive by international standards. Since then, further steep price rises across the NEM in autumn and winter 2016 have further exacerbated price differentials, surely now placing Australia amongst the most expensive producers of electricity in the world. </p>
<p>No doubt the gas lobby will absolve the industry from any responsibility for the recent events that have transpired on our electricity markets, arguing the solution lies in even more gas production, and that renewable energy policies are more to blame. </p>
<p>To be sure, eastern Australia is short on supply of cheap conventional gas from the offshore Gippsland Basin and a few other locations. Expanding the gas base by exploiting unconventional resources such as CSG was always going to come at a price, since such resources are inherently more expensive. </p>
<p>But developing the new CSG fields at such scale was always going to risk that production would fall short of targets. As much was acknowledged by the joint Department of Industry and Bureau of Resources and Energy Economics study into <a href="http://www.industry.gov.au/Energy/EnergyMarkets/Documents/EasternAustralianDomesticGasMarketStudy.pdf">Eastern Australian gas markets</a></p>
<blockquote>
<p>The current development of LNG in eastern Australia and the expected tripling of gas demand are creating conditions that are in stark contrast to those in the previously isolated domestic gas market. The timely development of gas resources will be important to ensure that supply is available for domestic gas users and to meet LNG export commitments. Such is the scale of the LNG projects that even small deviations from the CSG reserve development schedule could result in significant volumes of gas being sourced from traditional domestic market supplies</p>
</blockquote>
<p>The hope is that the events of 2016 are transients, related to temporary <em>development schedule difficulties</em>. If they are not, then god help domestic consumers, not just those exposed to electricity prices but also right across the gas sector. A broader question for our gas exporters is just how much risk from any such <em>development schedule difficulties</em> is appropriate to defray onto domestic consumers? As the Eastern Australian Gas Markets Study highlights, it is not as though such circumstances were not anticipated.</p>
<p>In prosecuting the case to deliver more of our national gas resources to market, perhaps it is not too much to ask that domestic gas consumers are offered some insurance against any further <em>development schedule difficulties</em> incurred by our exporters? After all, it is our gas. </p>
<p>Domestic reservation, anyone? - at least while transitional issues work through the system.</p>
<hr>
<h2>Notes</h2>
<p>[1] Shale gas economics in the US is linked to co-produced liquids, and thus differs markedly from the CSG fields in Australia where there is no liquid hydorcarbon production.</p><img src="https://counter.theconversation.com/content/64213/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from the ARC for geological research. </span></em></p>The European Commission’s latest Quarterly report on electricity markets makes sobering reading down under. Over the last year wholesale electricity prices have been falling just about everywhere across…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/342752016-08-18T08:12:14Z2016-08-18T08:12:14ZArrium’s requiem and the events of July 7th<p>Mark July 7th as a <a href="https://en.wikipedia.org/wiki/Red_letter_day">red letter day</a> in Australia’s tortuous path to decarbonisation - a day of <em>special significance</em> and <em>opportunity</em>.</p>
<p>The causes and consequences of the wild gyrations on the South Australian electricity wholesale market that day will be scrutinised for months, worrying regulators, politicians, businesses and commentators alike. The events, and how we interpret them, will have ongoing implications for future business investment decisions, for the survival of struggling businesses such as Arrium, and for how we meet the challenge of decarbonisation. </p>
<p>The events of July 7th will, no doubt, sharpen the minds of our energy ministers who are meeting Friday (19th August) in Canberra at the COAG Energy Council. Thankfully, recent statements by the Federal Minister Josh Frydenberg lend hope to the idea that rationality will trump ideology in any COAG outcome. However recent history suggests it will take some time before the bipartisanship emerges essential to realising the opportunity of our <em>red letter day</em>. Ever the optimist, I remain hopeful.</p>
<p>And in that hope, Dylan McConnell and I have prepared a rather lengthy analysis of those events in a report titled <em>Winds of Change - An analysis of recent changes in the South Australian electricity market</em>, <a href="http://energy.unimelb.edu.au/library/winds-of-change-an-analysis-of-recent-changes-in-the-south-australian-electricity-market">available at this link</a>. Here I summarise some key points we consider in that analysis.</p>
<h2>What happened July 7th</h2>
<p>July 7th was a calm, cold winter day across South Australia, as it was exactly one year before. </p>
<p>Demand for electricity reached a high of over 2183 megawatts in the early evening well above the typical South Australian average of around 1300-1400 megawatts. The calm conditions meant the output of the 1575 megawatts of installed wind capacity fell to almost zero by mid afternoon and contributed no more than 23 megawatts throughout the high demand evening period. With upgrades on the Heywood interconnecter into Victoria severely limiting the ability to import power, gas generators and a little bit of diesel were all that were available. With Engie’s gas (CCGT) Pelican Point station effectively mothballed (having earlier on-sold its gas supply into the gas market), AGL (Torrens A and Torrens B stations) and, to a lesser extent, Origin (Osborne and Quarantine stations) were in a pivotal supplier positions at various stages across the day, meaning they were needed to meet demand. The capacity bid into the market topped out at 2413 megawatts.</p>
<p>The relevant data is captured in the images below. The first shows the dispatch by fuel type over the period 6th July through to 8th July. The second shows the dispatch by generator/wind farm averaged across 7th July. The third shows the contributions made by interconnector, and different fuels, along with wholesale prices for the period midday through to 11 pm on 7th July.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134537/original/image-20160817-3569-1rf2rc6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">South Australian electricity market dispatch coloured by fuel type for the period 6th July - 8th July, 2016. ‘Other’ shown in pink represents distillate/diesel. Note the oscillations in the dispatch of gas on the afternoon and evening of July 7th, which are anti-correlated with import/export flows on the interconnecters as shown in two figures below.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=167&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=167&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=167&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134574/original/image-20160818-12292-7tvz2w.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dispatch by power station and fuel type averaged across the day for July 7th 2016 in South Australia. Stations dispatching less that 10 megawatts are not shown. Other is distillate.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=576&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=576&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=576&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=724&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=724&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134693/original/image-20160818-12300-v31pg6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=724&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Time series for South Australia on July 7th 2016 from midday onwards. Panel a shows the 5-minute dispatch price with logarithmic scaling. Panel b show interconnector flows, for Hewywood (V-SA) rand Murraylink (V-S-MNSP1). Lower panels show the output of gas-fired generators, wind and distillate generation.</span>
</figcaption>
</figure>
<p>Across the day, SA dispatch prices (that are resolved at the 5-minute interval) exceeded $10,000 per megawatt hour (MWh) on 24 occasions, and the volume weighted price for the day was just above $1400/MWh. The peak settlement price (resolved at the 30-minute interval) of just below $9,000/MWh occurred between 7:00pm and 7:30pm, with 19 settlement periods across the day exceeding $1000/MWh. For reference, the average wholesale price in South Australia is about $60/MWh and normally there are only around 40 settlement periods exceeding $1000/MWh each year (a total of 53 were recorded in July 2016 alone).</p>
<p>Settlement prices were above $2000/MWh for most of the afternoon and evening.
In the extreme trading interval between 7:00pm and 7:30pm wind was dispatching only 13.5 megawatts and other generators displayed erratic dispatch patterns. For example, the output from the AGL Torrens Island plants reduced by 90 megawatts soon after 7:00 pm while the prices remained near the price cap of $14,000/MWh.</p>
<p>To provide a reference frame, it is useful to compare the events of July 7th this year with the same period of last year, as shown below. The comparison is made all the more useful because in both years July 7th weather conditions were similarly calm, with low to negligible wind generation in the critical early evening period, and a very similar demand profile (peak demand on July 7th 2015 of 2133 megawatts). However, in 2015, Alinta’s brown coal Northern Power Station in Point Augusta was still operating, contributing around 350 megawatts, and the Heywood interconnect was fully operational allowing imports to average around 530 megawatts, and up to 620 megawatts at peak. Together, that meant for what were essentially equivalent conditions, some 700 megawatts less gas was being dispatched on July 7th in 2015, compared to the same day a year later. </p>
<p>For the period midday through 11:00pm prices on July 7th 2015 averaged only $112/Mwh, with only one 5 minute price interval spiking above $500/MWh.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134575/original/image-20160818-12303-2fqj9c.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">South Australian electricity market dispatch coloured by fuel type for the period 6th July - 8th July, 2015.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=168&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=168&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=168&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=211&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=211&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134573/original/image-20160818-12300-1o2asvz.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=211&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dispatch by power station and fuel type averaged across the day for July 7th 2015 in South Australia.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=576&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=576&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=576&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=724&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=724&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134690/original/image-20160818-12315-18ezunb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=724&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Time series for South Australia on July 7th 2015 from midday onwards. Panel a shows the 5-minute dispatch price with logarithmic scaling. Panel b show interconnector flows, for Hewywood (V-SA) rand Murraylink (V-S-MNSP1). Lower panels show the output of gas-fired generators, wind and distillate generation.</span>
</figcaption>
</figure>
<p>A key notable difference between the winters of 2015 and 2016 was the price of gas, which had literally gone through the roof, by 375% for the day of July 7th (335% for the week).
But that was nothing compared to the wholesale electricity price outcomes which had gone stratospheric, rising some 2000% over the midday to 11:00 pm intervals considered here. </p>
<h2>Concentrating market power</h2>
<p>Our wholesale energy-only market is deliberately structured with a very high market cap price ($14,000/MWh). Scarcity events are valued way above the cost of fuel, which typically would amount to only a few $‘00/MWh for even the most expensive diesel or gas generator, to ensure that enough generation capacity is available to meet rare high demand periods. For example, a gas peaking generator that may be needed only a few days a year, needs to recoup prices in the $'000’s/MWh for the times it is dispatching in an energy only market in order to cover long run costs. </p>
<p>To avert risks and ensure supply, participants normally engage via the contract market, rather than directly through the wholesale market. A variety of standard contracting arrangements are available. <em>Cap contracts</em> reduce exposure to extreme price spikes by setting a strike price typically at $300/MWh. The cap contract provides a form of insurance to mitigate exposure to high price events, where the buyer pays a contract price to the supplier independent of the wholesale price outcome, and in return gets recompensed for any wholesale price events above the strike price. </p>
<p>The importance is that it has been <a href="http://www.afr.com/business/energy/electricity/election-2016-high-south-australia-energy-prices-hit-arrium-hard-20160627-gpsrh1">rumoured</a> that some large energy users in South Australia were either uncontracted or under-contracted on their supply this year. Any energy intensive business exposed to the wholesale market on July 7th would have been in for one almighty shock. And for those that do make sure they are fully contracted, they will face the consequences as the higher wholesale prices are passed through to the futures markets, as <a href="http://www.climatecouncil.org.au/perfect-storm-report">Andrew Stock indicates they inevitably will</a>.</p>
<p>The Australian Energy regulator reports that the extent of contracting varies across the regions that make up the National Electricity Market (NEM), with South Australia reportedly with lower liquidity than other regions. That is consistent with issues to do with market power, or perceptions thereof, and there are certainly strong indications that market power has become excessively concentrated in South Australia.</p>
<p>As noted above, on July 7th key generators were in the positions of pivotal supply, by our estimates, AGL for around 87% of the day and Origin for 11%.</p>
<p>There are very good reasons for prices to rise during scarcity events, but how much they rise is dependent on competition. Pivotal suppliers are able to exercise market power to extract so called monopoly rents, and there is certainly some circumstantial evidence that suggests as much, perhaps partly motivated by a desire to force buyers back onto the contract market. Who knows?</p>
<p>A useful index for market concentration is the Herfindahl-Hirschman index (HHI). As the sum of the squares of the market percentage shares, it can rise to 10,000 for 100% concentration. The ACCC sets an HHI index at 2000 to flag competition concerns. The UK’s Office of Gas and Electricity Markets (OFGEM) regards an HHI exceeding 1000 in an electricity market as concentrated and above 2000 as <em>very concentrated</em>. With a current HHI value of 1243, the OFGEM considers the UK wholesale electricity market somewhat concentrated. According to the Australian Energy Regulator, the regional NEM markets had HHI indices in the range 1700-2000 in 2015. With the closure of Alinta’s Northern and the mothballing of Engie’s Pelican Point station, the effective HHI index in South Australia in July this year was probably around 3300-3400, making it <em>exceedingly concentrated</em>.</p>
<p>Market concentration in South Australia is a consequence of events dating as far back as 2000 when the state government put its generation assets up for sale. Then minister Rob Lucas refused a request from Origin to split the two gas fired generating stations at Torrens Island (Torrens A and Torrens B), on advice from Morgan Stanley deciding to sell them as a bundle to TXU. One can only surmise the combination was worth more than the sum of the parts, presumably because it would give its new owner greater power. South Australians may now be paying the dues owed on that decision.</p>
<p>But other factors have also conspired. AGL, who acquired Torrens island from TXU in 2007, was not responsible for Alinta’s decision to close Northern in May, or Engie’s mothballing of Pelican Point earlier in the year. </p>
<p>However, by virtue of these events AGL has found itself in a position of unprecedented market power. How it and other participants responded will no doubt be examined in excruciating detail in coming months, not in the least because AGL could find itself in a similar position if Hazelwood or Yallourn were to exit Victoria.</p>
<p>What we know is that margins on South Australian gas generation units have increased dramatically in recent times rising from about $20/MWhr to many times that, in a measure known as the <em>spark spread</em>. As the figure below shows, despite the gas market price rises affecting all regions, South Australia is the only region to show any significant rise in the margins of gas generators. Given that volumes have also risen, such a dramatic rise in margins is hardly the trade off one expects for an efficient competitive market.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134590/original/image-20160818-12312-1t48rra.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Top panel - illustrates the spark spread for gas generation in South Australia. The margins for Queensland, New South Wales and South Australia are compared in the bottom panel, since February 2015. Prior to June 2016, the spark spread was relative constant and broadly consistent across the three regions, with the exception of the late summer and early autumn period when Queensland spark spread was elevated by a factor of about four. Prior to June 2016, the South Australian spark spread averaged $17/MWhr. That value is comparable to the spark spread in other, completely unrelated jurisdictions such as the United Kingdom. We assume a typical Combined Cycle Gas Turbine with an assumed thermal efficiency of 50%, analysis by Dylan McConnell.</span>
</figcaption>
</figure>
<h2>So what should we make of this?</h2>
<p>A number of interdependent factors are playing out in the evolving South Australian electricity sector. The aggregate effect manifest dramatically on July 7th reflects a complex interplay between legacy issues (including existing asset ownership), the increasing penetration of wind generation, competing developments in the gas market, and the absence of coordination of transitional arrangements.</p>
<p>The rise in wind generation in South Australia since 2006 has impacted in several ways. It has contributed downward pressure on wholesale prices, which declined in real terms in the period 2008 through 2015 (while also generating net Large-scale Renewable Energy Target certificates to the annual value of about $120 million). It is of note that over the five years prior to the winter of 2016, the wholesale market prices in South Australia have been pretty much on par with those in Queensland, which has no wind assets.</p>
<p>However, in supressing wholesale prices, wind generation has contributed to decisions to close brown coal generators, and increased South Australian dependence on imports and, in times of low wind output, gas. As one of the largest stations on the NEM in terms of capacity relative to regional demand, the closure of Northern Power Station in May, 2016, has tightened the demand-supply settings, and that has reset the wholesale price clock upwards - a dynamic that is part of the ordinary capacity cycle in energy only markets.</p>
<p>The dramatic increases in gas prices in the winter of 2016, largely driven by dynamics in the export market (which have seen an 3-fold expansion of production in recent years) have added at least $140-$200 million to the annual cost of South Australian electricity supply. Due to its historic reliance on gas generation, South Australia has always been exposed to movements in gas prices even without the investment in wind. In pure energy terms, gas generation in South Australia has been declining over the last decade, due in significant part to the addition of wind to the generation mix. </p>
<p>Despite the closure of the Northern Power Station, South Australia gas dispatch has remained at near record low levels in seasonally-adjusted terms. What has changed dramatically since Northern’s closure is the concentration of market power. While there are legitimate reasons for power station owners to increase prices to reflect scarcity value, our analysis suggests that recent increases in wholesale prices have been well in excess of the reasonable market response, and reflect the extraction of monopoly rents. Such ‘opportunism’ has been encouraged by poor coordination of the system adjustments, such as mid-winter upgrades to Heywood interconnector.</p>
<p>Multiple options exist that address both of these issues to greater or lesser extent. OCGT is a cheap option to increase capacity and supply in peak periods, but does not improve competition or supply outside these periods and is still partially dependent on gas prices. Storage options can both increase capacity in peak periods, and increase competition through daily arbitrage opportunities. Concentrating solar thermal (CST) further reduces the consumption and reliance on gas, while providing capacity. Additional interconnection (above and beyond the current 190 megawatt expansion of Heywood) may also prove to be a viable solution. Adding a robust demand-side market to the existing supply-side market would add significant impetus to achieving energy productivity gains. </p>
<p>In the longer term, South Australian experience points to the need to diversify low emission generation and storage portfolios. As we necessarily decarbonise the national electricity system, large-scale storage including CST with storage will become increasingly necessary to provide for both peak capacity and reliability of supply. </p>
<p>Finally, the South Australian experience provides a salutary forewarning of the havoc that can ensue from lack of coordinated system planning in times of transition. It bears on the question of disorderly exit that will be faced in all markets requiring substantial decarbonisation, in part because of the scale of the fossil power stations that are displaced. South Australia highlights the potential benefits for system wide oversight of transitional arrangements to avoid market power issues. The recent price rises in South Australia would have been much less extreme had Northern’s closure not occurred prior to completion of the upgrade to the Heywood interconnect at a time when Pelican Point was effectively mothballed (reflecting the opportunity cost of the gas export market), and demand was rising to meet the winter peak. As it transpired, the coincidence of all these factors contributed to a rapid and unprecedented concentration of market power.</p>
<p>And for the COAG meeting need we emphasize that the benefits of market competition can only be realised if markets are competitive?</p>
<p>For the full details see our report “Winds of Change - An analysis of recent changes in the South Australian electricity market” <a href="http://energy.unimelb.edu.au/library/winds-of-change-an-analysis-of-recent-changes-in-the-south-australian-electricity-market">available here</a>, for which any credit should go to coauthor Dylan McConnell.</p><img src="https://counter.theconversation.com/content/34275/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from the Australian Research Council for geological work. </span></em></p>Mark July 7th as a red letter day in Australia’s tortuous path to decarbonisation - a day of special significance and opportunity. The causes and consequences of the wild gyrations on the South Australian…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/639902016-08-16T04:31:25Z2016-08-16T04:31:25ZOur planet is heating - the empirical evidence<p>In an entertaining and somewhat chaotic episode of ABC’s Q&A (Monday 15th August) pitting science superstar Brian Cox against climate contrarian and global conspiracy theorist and now senator Malcolm Roberts, the question of cause and effect and empirical data was raised repeatedly in regard to climate change.</p>
<p>Watching I pondered the question - <em>what would I need to change my mind?</em> After all, I should dearly love to be convinced that climate was not changing, or if it were, it were not due to human emissions of CO2 and other greenhouse gases. That would make things just so much easier, all round. </p>
<p>So what would make me change my mind? </p>
<p>There are two elements to this question. The first is the observational basis, and the question of empirical data, of a changing climate. The second relates to cause and effect, and the question of the greenhouse effect. </p>
<p>On the second, I will only add that the history of our planet is not easily reconciled without recourse to a strong greenhouse effect. If you have any doubt then you simply need to read my former colleague Ian Plimer.<br>
As I have <a href="http://www.theaustralian.com.au/national-affairs/opinion/cherry-picking-contrarian-geologists-tend-to-obscure-scientific-truth/story-e6frgd0x-1226233605954">pointed out before</a>, in his 2001 award-winning book “A Short History of Planet Earth”, Ian has numerous references to the greenhouse effect especially in relation to what all young geologists learn as the <em>faint young sun paradox</em>:</p>
<p>“The early sun had a luminosity of some 30 per cent less than now and, over time, luminosity has increased in a steady state.”</p>
<p>“The low luminosity of the early sun was such that the Earth’s average surface temperature would have been below 0C from 4500 to 2000 million years ago. But there is evidence of running water and oceans as far back as 3800 million years ago.”</p>
<p>The question is, what kept the early Earth from freezing over?</p>
<p>Plimer goes on to explain: “This paradox is solved if the Earth had an enhanced greenhouse with an atmosphere of a lot of carbon dioxide and methane.” </p>
<p>With Ian Plimer often touted as one of the grand priests of climate contrarians, I doubt that Malcolm Roberts would consider him part of a cabal of global climate change conspiracists, though that would be ironic.</p>
<p>As a geologist, I need to be able to reconcile the geological record of a watery planet from time immemorial with the faint young sun hypothesis. And, as Ian points out, with nothing else on the menu, the greenhouse effect is all we have. </p>
<p>If the menu changes, then I will reconsider.</p>
<p>How about the empirical data?</p>
<p>Along with Brian Cox, I find it implausible that an organisation like NASA, with a record of putting a man on the moon, could or would fabricate data to the extent Malcolm Roberts insinuates. It sounds such palpable nonsense, it is something you might expect from an <a href="http://rationalwiki.org/wiki/Anti-vaccination_movement">anti-vaxer</a>.</p>
<p>However, a clear message from the Q&A episode is there is no way to convince Malcolm Roberts that the meteorological temperature data has not been manipulated to achieve a predetermined outcome. So he simply is not going to accept those data as being empirical.</p>
<p>However,
the relevant data does not just include the records taken by meteorological authorities. It also includes the the record preserved beneath our feet in the temperature logs from many thousands of boreholes across all inhabited continents. And the importance of those logs is that they are reproducible. In fact Malcolm can go out an re-measure them himself, if he needs convincing they are “empirical”.</p>
<p>The idea that the subsurface is an effective palaeo-thermometer is a simple one that we use in our every day life, or used to at least prior to refrigeration, as it provides the logic for the cellar. </p>
<p>When we perturb the temperature at the surface of the earth, for example as the air temperature rises during the day, it sends a heat pulse downwards into the earth. The distance the pulse travels is related to its duration. As the day turns to night and the surface cools, a cooling pulse will follow, lagging behind, but eventually cancelling, the daily heating. The diurnal surface temperature perturbations produce a wave like train of heating and cooling that can be felt with diminishing amplitude down to a <em>skin depth</em> less than a metre beneath the surface before all information is cancelled out, and the extremes of both day and night are lost. </p>
<p>Surface temperatures also change on a seasonal basis from summer to winter and back again, and those temperatures propagate even further to depths of around 10 metres before completely cancelling [1]. </p>
<p>On even longer cycles the temperature anomalies propagate much further,
and may reach down to a kilometre or more. For example, we know that over the last million years the temperature on the earth has cycled in and out of numerous ice ages, with a period of about 100,000 years. Cycles of that duration can propagate more than one kilometre into the earth, as we see in deep boreholes, such as the Blanche borehole near the giant Olympic Dam mine in South Australia. From our analysis of the Blanche temperature logs we infer a surface temperature amplitude of around 8°C over the glacial cycle.</p>
<p>So what do we see in the depth range of 20-100 metres that is sensitive to the last 100 years, and most relevant to the question of changing climate?</p>
<p>The image below shows the temperature log from a borehole that we purpose drilled in Gippsland as part of <a href="http://www.auscope.org.au/australian-geophysical-observing-system-agos/">AuScope AGOS program</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134200/original/image-20160815-13011-ak0ljf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Temperature log in the upper 70 metres of the Tynong AGOS borehole drilled and cored to a depth of 500 metres. The temperature logs shown here were obtained by Kate Gordon, as a student at the University of Melbourne.</span>
</figcaption>
</figure>
<p>The temperature profile shows various stages. Above the water table at about 15 metres depth, due to infiltration of groundwater in the vadose zone, the temperatures in the borehole rapidly equilibrate to seasonal surface temperature changes. In the winter, when this temperature log was obtained, the temperatures in this shallow zone trend towards the ambient temperature around 12°C. In summer, they rise to over 20°C. Beneath the vadose zone, the temperature in the borehole responds to the conduction of heat influenced by two dominant factors, the changing surface temperature on time-scales of decades to many hundred of years, and the heat flow from the deeper hot interior of the earth. During a rapid surface warming cycle lasting more than several decades the normal temperature gradient in which temperatures increase with depth can be reversed, so that we get a characteristic rollover (with a minimum here seen at about 30 metres depth). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=426&fit=crop&dpr=1 600w, https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=426&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=426&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=535&fit=crop&dpr=1 754w, https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=535&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/134201/original/image-20160815-13007-1kxmnmg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=535&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Inversion of the Tynong temperature log for surface temperature change over the last 700 years, with uncertainties at the 95% confidence interval. The inversion, which is based on Fourier’s law of heat conduction, shows that we can be confident that the Tynong AGOS borehole temperature record is responding to a long-term heating cycle of 0.3-1.3°C over the last century at the 95% confidence level. The inversion shown here was performed by Kate Gordon.</span>
</figcaption>
</figure>
<p>In geophysics we use the techniques of inversion to identify causative signals, and their uncertainties, in records such as the Tynong borehole log, as well as in the estimation of the value of buried ore bodies and hydrocarbon resources. As shown in the second image, the inversion of the Tynong temperature log for surface temperature change over the last 700 years, with uncertainties at the 95% confidence interval, is compelling. Not surprisingly as we go back in time the uncertainties become larger. However, the inversion, which is based on Fourier’s law of heat conduction, shows that we can be confident that the Tynong AGOS borehole temperature record is responding to a long-term heating cycle of 0.3-1.3°C over the last century at the 95% confidence level.</p>
<p>If there were just one borehole that showed this record, it would not mean much. However the characteristic shallow rollover is present in all the boreholes we have explored, and has been reported in many thousands of boreholes from all around the world. </p>
<p>The only way we know to sensibly interpret such empirical evidence is that ground beneath our feet, down to a depth of around 50 metres or so is now heating from above. The physics that explains these observations dates back to Joseph Fourier, over 200 years ago, so its not exactly new or even contentious. In effect the solid earth below is now absorbing heat from the atmosphere above, counter to the normal process of losing heat to it. However, if Malcolm can bring to the table an alternative physics to explain these observations, while not falling foul of all the other empirical observations that Fourier’s law of heat conduction admits, then I am happy to consider, and put it to the test. (I suspect Brian Cox would be too, since all good physicists would relish the discovery of a new law of such importance as Fourier’s law).</p>
<p>Perhaps the hyper-skeptical Malcolm thinks that somehow the global cabal of climate scientists has got into all these thousands of boreholes with an electrical heater to propagate the heat signal that artificially simulates surface heating. More fool me.</p>
<p>But, if he does, then I am perfectly happy to arrange to drill a new borehole and, along with him, measure the temperature profile, making sure we don’t let those pesky climate scientists get at the hole with their heating coils before we have done so. </p>
<p>And I’ll bet him we can reproduce the signal from Tynong shown above. </p>
<p>But I’ll only do it on the condition that Malcolm agrees, that when we do (reproduce the signal), he will publicly acknowledge the empirical evidence of a warming world entirely consistent with NASA’s surface temperature record. </p>
<p>Malcolm, are you on? Will you take on my bet, and use the Earth’s crust as the arbiter? Perhaps Brian will stream live to the BBC?</p><img src="https://counter.theconversation.com/content/63990/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from the Australian Research Council to investigate the thermal structure of the Australian crust.</span></em></p>In an entertaining and somewhat chaotic episode of ABC’s Q&A (Monday 15th August) pitting science superstar Brian Cox against climate contrarian and global conspiracy theorist and now senator Malcolm…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/616402016-06-28T13:11:50Z2016-06-28T13:11:50ZHazelwood highlights our tangled web of energy policy<h1>The strangeness of last Sunday …</h1>
<p>Has there ever been better times for our electricity utilities?</p>
<p>Sunday is typically pretty subdued in terms of electricity demand. Consequently Sunday wholesale electricity prices are at the low-end of the weekly range, even with the extra demands of a chilly winter day. </p>
<p>Since the beginning of 2008, the Sunday market price in Victoria averages about $23 per megawatt hour, factoring out the carbon tax component. That is about half the average weekday price of $43.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128420/original/image-20160628-28391-15lvpl1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Victorian wholesale electricity pricing for Sundays from 2008 on. Note the extraordinary nature of Sunday 26th, 2016. Data from AEMO’s half hour price and demand datasets. Coloured solid lines show Sunday averages. Coloured dashed lines show the volume weighted price for working week-days. Black line shows Sunday 26th 2016. Colour distinguishes carbon pricing (blue) and non carbon pricing (red) intervals. Data sourced from AEMO.</span>
</figcaption>
</figure>
<p>Sunday prices do vary across the year rising slightly in the winter months. Between 2008 and 2015, June Sunday prices have averaged about $31 with a high of $50 on Sunday June 1, 2008. </p>
<p>So what can we make of last Sunday (26th June 2016), when the volume-averaged price in Victoria was a staggering $120, almost four times above the long-term?</p>
<p>Last Sunday was not just a once off, as the price for every June Sunday this year topped $75 - more than 50 per cent higher than any previous June Sunday in the last 8 years. </p>
<p>And Victoria isn’t alone. Right across the National Electricity Market (or NEM), prices have been stratospheric. Last Sunday, South Australia topped the class at $158, closely followed by New South Wales at $133. </p>
<p>As pointed out in <a href="https://theconversation.com/electricity-prices-the-election-agenda-and-the-case-for-bipartisanship-61297">my post a week ago</a>, in historical terms these prices are simply staggering, and it’s not very obvious why.</p>
<p>If these prices remain, they will have widespread consequences, as they flow through to the contract market. So it is important to get to grips with what is going on.</p>
<p>Last Sunday was <a href="http://www.theage.com.au/victoria/winter-truly-hits-melbourne-as-it-shivers-through-coldest-morning-of-the-year-20160625-gprz8s.html">Melbourne’s coldest morning of the year</a>, with several coldest-day records set across Victoria. So we might expect some extra heating was stretching the power system, helping drive up prices. </p>
<p>However, while the Victorian demand was higher than average for a Sunday, it was about 10 per cent lower than the Victorian average weekday demand. So we really can’t pin Sunday’s extreme prices on unusual demand. Moreover, last Sunday net Victorian exports amounted to about 15 per cent of its electricity production (see note 1). So there was no shortage of supply to meet local demand. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128419/original/image-20160628-28366-12u6fus.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Victorian average Sunday electricity demand in megawatts, from 2008 on. Note while last Sunday (June 26 2016) demand was above the Sunday average, it was substantially lower than the weekday average. Coloured solid lines show Sunday averages. Coloured dashed lines show weekday averages. Black line shows Sunday 26th 2016. Colour fills distinguish carbon pricing (blue) and non carbon pricing (red) intervals. Data from AEMO’s half hour price and demand datasets.</span>
</figcaption>
</figure>
<h1>Why are prices so high?</h1>
<p>Rather than originating in Victoria, the reasons for the strange pricing events reside elsewhere on the NEM. They
point to the emerging issue of the inter-regional coupling, the tangle of energy policies across the NEM and other energy sectors such as gas, and the power of industry incumbents. </p>
<p>In comparison to Victoria, Queensland demand last Sunday morning was significantly above expectation, slightly exceeding even the weekday demand average. Demand has been growing strongly in Queensland, partly because of the commissioning of its gas export processing plants. Still, at not much more than the weekday average, it is hard to understand why last Sunday’s demand in Queensland would be sufficient to drive prices to $115. As outlined below, with gas prices rising we would expect Queensland prices to follow if more coal-fired power could not be bought online. But at the time coal generation was running at around 75 per cent capacity. Why?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128434/original/image-20160628-28362-16s7q4n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Queensland average Sunday electricity demand (grid-based) in megawatts, since the beginning of 2008. Data from AEMO’s half hour price and demand datasets. Coloured solid lines show medians for this period. Colours dashed lines show the average for all times of the week. Black line shows Sunday 26th 2016. Colour distinguishes carbon pricing and non-carbon pricing days.</span>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128433/original/image-20160628-8002-ndx5xc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Queensland wholesale Sunday pricing since the beginning of 2008. Data from AEMO’s half hour price and demand datasets. Coloured solid lines show medians for this period. Colours dashed lines show the volume weighted price for all times of the week. Black line shows the morning of Sunday 26th 2016. Colour distinguishes carbon pricing and non carbon pricing days.</span>
</figcaption>
</figure>
<p>As with Queensland, New South Wales demand was close to the highest recorded for a Sunday. But while New South Wales was importing furiously, at what would seem to be over the odds prices, its coal generators were running at only 68 per cent capacity. Why?</p>
<p>In South Australia demand was not exceptional in terms of recent history, <a href="https://theconversation.com/goodbye-northern-lights-hello-sunlight-58219">but the recent closure of Northern coal-fired power plant</a> has significantly tightened supply settings there and made it much more sensitive to the cost of marginal gas generators. Meanwhile its cleanest, most efficient, and one of its largest gas generators, Pelican Point, sits idle. Why?</p>
<p>Sunday was not only cold in South Australia, but it was also not very windy. As a consequence output from wind generation averaged only about 25 per cent of installed capacity. With only modest wind output, and with no coal, South Australia generation was dominated by gas, the price of which is surging on the <a href="https://www.aer.gov.au/system/files/AER%20gas%20weekly%20report%20-%205%20%E2%80%93%2011%20June%202016.pdf">back of increased LNG export pipeline flows</a> (<a href="http://reneweconomy.com.au/2016/know-nem-week-ended-june-26-2016">see also</a>). In addition, South Australian consumption was heavily augmented with Victorian imports. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128479/original/image-20160628-7857-2s5o3z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">South Australian dispatch in megawatts for Sunday 26th 2016, showing the dominant role played by gas generators. In addition to local generation, imports from Victoria averaged around 300 megawatts over the day (see note 1).</span>
</figcaption>
</figure>
<p>The important point is that, for whatever reason, prices are being signalled right across the NEM, from Queensland and South Australia through to Tasmania. </p>
<p>This price signalling is having some paradoxical effects. Just last week, <a href="http://www.abc.net.au/news/2016-06-23/power-bill-increase-to-hit-tasmanians-as-victorian-price-surge/7534812?section=tas">the Office of the Tasmanian Economic Regulator approved an increase in retail</a> prices of 3.43 per cent, effective this Saturday, on the back of the high market prices in Victoria. The surprise is that <a href="https://theconversation.com/a-new-normal-as-basslink-finally-resumes-61195">Tasmania has just emerged from its own energy crisis</a> with recent rains together with the re-connection of Basslink allowing exports for the first time in almost 10 months. Just as supply constraints relaxed for the time being and security restored though Basslink, long-suffering Tasmanian consumers are the first to be hit with price-hikes.</p>
<p>And in Victoria, where prices are responding to distant drivers, brown coal generators must be laughing at their good fortune.</p>
<h2>Hazelwood’s “super-profits”</h2>
<p>Across the last 4 weeks, market prices in Victoria have averaged $98 per megawatt hour when weighted by volume. In Victorian wholesale market terms the total value of dispatch was about $370 million. That is almost three times higher than the equivalent period last year. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=343&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=343&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=343&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=431&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=431&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128456/original/image-20160628-7840-1x6srtl.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=431&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Victorian price by 5-minute intervals, for the last 4 weeks. Red line shown the average prices weighted by volume. Note how regularly 5-minute prices have risen to $300 per megawatt hour as indicated by the dashed line.</span>
</figcaption>
</figure>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=343&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=343&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=343&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=431&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=431&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128457/original/image-20160628-7842-wevtdk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=431&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As with the above figure, for the equivalent period in 2015.</span>
</figcaption>
</figure>
<p>While Hazelwood’s output will be contracted at much lower prices, with futures contracts already rising it looks like it is boom times for the owners of Victoria’s brown coal stations, like the French energy utility Engie that operates the Hazelwood power station. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=343&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=343&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=343&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=431&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=431&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128921/original/image-20160630-30642-kf4luj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=431&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Value of Hazelwood dispatch in terms of Victorian wholesale market prices, for the 4 week period from May 29 - June 25. Carbon tax contribution calculated using emissions intensity of 1.56 tonnes CO2 per megawatt hour. Costs estimated at $5. See note 3.</span>
</figcaption>
</figure>
<p>In Victorian market terms, the value of Hazelwood’s dispatch over the last 4 weeks was worth around $70 million (see note 3). That compares with the market value of around $20 million in June last year, and less than $10 million in June 2014 when the carbon tax liability is factored out. </p>
<p>On an annualised basis, the market value of Hazelwood’s dispatch amounts to around $900 million, a truly phenomenal turn-around from 2013 when the Commonwealth Bank sold its 8.3% stake that it had previously valued at just $1 million (see notes 2 & 3).</p>
<p>Hazelwood is Australia’s most contentious power station - a proverbial lightning rod for the debate about our energy system. As Victoria’s oldest, most emission intensive coal fired power station it has been plagued by community concern. At around 1.56 tonnes per megawatt hour it produces about three times the CO2 of a modern gas plant such as the super efficient combined cycle Pelican Point gas plant in South Australia,<a href="http://www.gdfsuezau.com/about-us/asset/Pelican-Point-Power-Station">Engie’s other main asset in Australia</a>. Already it is some 10 years over its use-by-date.</p>
<p>But, in terms of its balance sheet, Hazelwood has probably never seen such good times. Meanwhile Engie <a href="https://en.wikipedia.org/wiki/Hazelwood_Power_Station">reportedly disputes liability for the $18 million costs incurred by the Country Fire Authority</a> for fighting a month long fire in Hazelwood’s mine in early 2014. </p>
<p>While Engie is set to enjoy remarkable “super-profits” from Hazelwood, should we ask at what cost. With Victorian electricity exports to South Australia and New South Wales averaging around 1000 megawatts, Hazelwood arguably exists to underwrite those exports (see note 1). Meanwhile Engie’s Pelican Point Power Plant in South Australia sits idle, its gas contracts reputedly on sold presumably to the export market. If Engie were to fire up Pelican Point, it would reduce our national emissions by several million tonnes each year, and arguably put downward pressures on South Australian prices that would then be signalled across the country. </p>
<p>But perhaps that is exactly why. Oh what a tangled web our national energy policy is.</p>
<h1>The headache for next Sunday</h1>
<p>I doubt next Sunday, on the morning after the federal election, many will be watching the electricity prices. But some will, hoping the electricity market magically returns some normality. After all, it will not just be the first day of the new government, it is also the start of a new financial year.</p>
<p>Could it be that the current market prices are being manipulated by our electricity oligarchs to improve their bottom lines before the end of the financial year? Or will the high prices persist, reflective a fundamental shift in market dynamics, as the various threads of national energy policy tangle more tightly. </p>
<p>Surely we can understand that it is just not right to let the market dynamics encourage the likes of Engie to operate in Australia as if there is no tomorrow, rewarding it handsomely to dump some 15 million tonnes of CO2 into our atmosphere each year leaving Pelican Point idle. Would Engie be given license to do that in France. I doubt so, so why here?</p>
<p>But it is not so much Engie that is the problem, or any other player, as it is the whole tangled web of our national energy policy that is tightening at each turn. Either way, next Sunday will present the new government with the massive headache of untangling this web. We are in desperate need of a bipartisan approach with a sharp focus on how we rebuild our energy system fit for the challenges ahead, adding environmental concerns as an equal to the existing priorities of security and affordability. After all, last Sunday highlights that our existing energy system is not looking particularly affordable. And, like Hazelwood, much of it is beyond its use-by-date, so probably it is not that secure. And for sure it is an environmental disaster.</p>
<hr>
<h1>Notes</h1>
<p>[1] The exceptional electricity pricing on Sunday 26th June 2016 is illustrated by the morning period between 8am and 9 am. Electricity consumption (TOT.DEMAND), production (DISPATCH.GEN), interchanges (NETINTERCHANGE) and prices (VWP) by the NEM regions. NETINTERCHANGE are +ve for export. Flows between the regions are coloured by the exporting region, and labelled by INTERCONNECTOR. Note that Victoria was exporting over 1160 megawatts, 380 megawatts to South Australian and 880 megawatts to New South Wales. In turn Victoria was importing 200 megawatts from Tasmania. The difference is essentially equivalent to the output of Hazelwood. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=381&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=381&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=381&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=479&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=479&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128146/original/image-20160626-28395-11j65wa.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=479&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">gv tree dot.</span>
</figcaption>
</figure>
<p>[2] <a href="http://environmentvictoria.org.au/media/cba-sells-its-hazelwood-power-stake">Hazelwood Power Station</a> was purchased by a consortium led by International Power in 1996 for $2.35 billion, before merging with GDF Suez, now Engie. In 2010, CBA revealed it had written down its 8 per cent share to $1 million “The Hazelwood power station probably wasn’t the best investment the bank made,” CBA chairman David Turner said at the time. CBA sold that share to GDF Suez for an undisclosed amount in 2013. </p>
<p>[3] Costs for Hazelwood production are reputedly very low, <a href="http://www.aemo.com.au/Electricity/Planning/Related-Information/Planning-Assumptions">by AEMO accounts at least $2.5 per megawatt hour</a>. Here I assume a value of $5. Note that revenues will be determined by contracts, and thus differ from the estimates of market values shown here. It’s noteworthy that <a href="https://www.asxenergy.com.au">Victorian baseload forward contracts</a> have risen about 25% over the last quarter, and 35% over the year, to around $50 per megawatt hour.</p><img src="https://counter.theconversation.com/content/61640/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from the Australian Research Council for geological research.</span></em></p>The strangeness of last Sunday … Has there ever been better times for our electricity utilities? Sunday is typically pretty subdued in terms of electricity demand. Consequently Sunday wholesale electricity…Mike Sandiford, Chair of Geology & Redmond Barry Distinguished Professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/612972016-06-22T03:05:29Z2016-06-22T03:05:29ZElectricity prices, the election agenda and the case for bipartisanship<p>In case you had forgotten, electricity prices were a really big deal in the last federal election campaign in 2013, albeit often disguised under the rubric of <em>axe the tax</em>. Then Coalition spokesmen quite deliberately and repeatedly conflated the term <em>carbon tax</em> with <em>electricity tax</em>. </p>
<p>Clearly this was deemed acceptable in the court of public opinion. The justification was that Labor’s carbon pricing mechanism specifically targeted the electricity sector rather than other key emission intensive sectors of the economy such as land-use and transport. </p>
<p>This time round, in the 2016 election campaign, electricity prices are much less prominent. The Coalition would have us believe that by axing the tax they have driven electricity prices down. The flow on effect from reduced household expenses is a rise in consumer confidence. And that, we are told, is a key stimulus in maintaining growth in face of strong economic headwinds, and one we shouldn’t risk by changing government. </p>
<p>Given the success of the Coalition strategy in the last election, Labor is understandably <em>gun-shy</em> on electricity prices. It also likely wants to avoid provoking further Coalition delight in spruiking one of their favourite epithets - <em>Electicity Bill</em>. </p>
<p>However, this is all a bit strange, because wholesale electricity prices have almost doubled over what they were at the equivalent stage of the last election cycle. Incredibly, they are 300% above what they were in the 2010 election.</p>
<p>While wholesale prices are by no means the full story on electricity prices (see note 2), they are an important part of the story, and they are relevant here because carbon pricing was applied at the wholesale level. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/127330/original/image-20160620-8867-1ofhtsj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Wholesale electricity prices in the 4 week period prior to the last four Australian federal elections. For the 2016 election cycle, the period is 23rd May - 20th June. For the previous three elections it is the 4 week period finishing on the election day. Prices are volume-weighted and differentiated by the region. Data from AEMO half-hour aggregated price and demand tables.</span>
</figcaption>
</figure>
<p>The current record wholesale electricity prices provoke a number of questions, not the least of which is <em>if electricity prices are so important why is consumer confidence so buoyant?</em> Perhaps the answer is that wholesale electricity prices really don’t matter that much. And if that is the case then shouldn’t we fess up to the idea <em>axing the tax</em> may have been largely immaterial to our economic outlook. </p>
<h2>What has happened to prices?</h2>
<p>The figure below shows the wholesale electricity prices for NSW since 2011, with the four week period May 23 through June 20 indicated in red. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/127646/original/image-20160621-13005-1tqvgrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Half-hour trading interval prices for NSW, from 2011 on. Red colours highlight the 4-week period 23 May - 20 June, with volume weighted prices in red boxes. The period of carbon pricing is shown in purple shading. Black boxes show the prices adjusted by removing the carbon prices assuming an emission intensity of 0.9 tonnes per megawatt hour. Units are dollars per megawatt hour. Numbers along the top indicate the number of intervals when prices exceeded $250 per megawatt hour in grey for the calendar year, red for the 4-week period.</span>
</figcaption>
</figure>
<p>Prior to the start of carbon pricing period in July 2012, NSW wholesale prices averaged about $30-35 per megawatt hour, reflecting subdued market conditions due to an ongoing decline in demand for grid supplied electricity. That decline started around 2009 and continued to 2015. During the carbon pricing years (mid 2012 - mid 2014) prices jumped by ~ $20 per megawatt hour, but volatility remained very subdued as indicated by the narrow spread in the half hour prices. Following the rescinding of the carbon pricing legislation, wholesale prices fell back to near 2011 to early 2012 levels, but only for a short period of time. Over the last year prices have risen relentlessly, and volatility has returned dramatically. Half hourly prices now regularly hit $300 per megawatt hour.</p>
<p>In NSW, at $101 per megawatt hour for the last four weeks, prices are almost 250% higher than the same period last year and almost double the equivalent period in the carbon pricing years. As illustrated below, other states show comparable trends, highlighting the exceptional nature of current prices. With the exception of anomalous prices in SA in 2013, current prices are way above anything that has been experienced in recent times. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/127635/original/image-20160621-12998-a3xcub.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Volume-weighted wholesale prices in four mainland states for the 4 week period May 24 - June 21, for 2011 on. Data from AEOM half-hour aggregated price and demand tables.</span>
</figcaption>
</figure>
<h2>Why are prices so high?</h2>
<p>In fact, across the eastern states prices are now averaging higher than at any time since the height of the Millennium Drought in 2007. Then drought conditions affected the supply from hydro stations and from some thermal (coal) generation due to limited availability of cooling water. With demand then growing at around 2% each year, the drought tipped the balance between demand and supply, driving up prices dramatically. The breaking of the drought in 2009 coincided with a sustained decline in demand for electricity, at around 1% per year, though to 2015. Despite some power plant closures (notably Anglesea and Northern) and mothballing of others, the market has been in a state of considerable oversupply. Notwithstanding the impacts of carbon pricing, both prices and volatility have been remarkably low, especially in NSW and Victoria.</p>
<p>Since early 2016, rises in price arguably reflect a tightening of the demand-supply balance, as demand has begun to pick up. </p>
<p>While that is what might be expected in a market that is operating efficiently it is unlikely to be the full story, since there is still very substantial underutilised capacity. For example NSW black coal generation is still only operating at about two third capacity. </p>
<p>With such excess in relatively low cost generators, there is suspicion that the market is not operating particularly efficiently. This suggestion has been made recently in Queensland, and the AEMC has indeed flagged this issue with a <a href="http://www.aemc.gov.au/Rule-Changes/Five-Minute-Settlement">request for rule change</a> that is supported by both the regulator and the operator in their submissions (see Note 1). </p>
<h2>Should electricity prices be part of the election agenda?</h2>
<p>The question of price manipulation in our energy market is significant and speaks to existing market rules and the powers of the regulator. The question of market efficiency is crucial and should be addressed as part of a bipartisan approach to energy pricing.</p>
<p>The broader question, and one that will no doubt divide the key parties, relates to the causes and consequences of the current high electricity prices. </p>
<p>As alluded earlier, there would appear to be an incongruency in the Coalition position with regard to the current prices. However, it is important to note that the market prices have yet to flow through to domestic retail prices. The Coalition should be worried if and when they do. According to the logic of their own <em>axe the tax</em> mantra, any flow through of the wholesale price rises should stymie what it argues is a somewhat fragile consumer confidence. And along with that, so to the edifice it has built in its own attacks on Labor’s economic plans.</p>
<p>However, it is important to understand that even at $100 MWhour, wholesale prices are still less than 50% of the standing offer of most domestic retail contracts (see note 2). That there is <em>fat in the system</em> is indicated by the preparedness of most retailers to offer discounts of up to 30% on standing offers for such things as paying on time. Such sweeteners amount to more than the rise in wholesale price we have seen over the last year, and given the vertically integrated nature of the much of the industry, at least some of what is gained on the generation side can delivered by the retail side with little detriment to shareholder value.</p>
<p>For small generators without retail arms, and for new entrants, the wholesale price rises are a godsend. For the first time in a decade wholesale prices are approaching the cost of new generation build. With an ageing, emission intensive generation sector, there is an urgency for new build. No matter what technology is contemplated nothing is viable at less than a long-term average of about $70-$80 per megawatt hour. </p>
<p>So the current prices should be encouraging with regard to many of the challenges facing the industry. Providing current prices are reflective of an efficient market one would hope for bipartisan recognition that current prices are appropriate to the challenge at hand.</p>
<p>However it should also be acknowledged that such prices are not sufficient to encourage new build alone. We know that adding new capacity to the system without any withdrawal will collapse the price back to the marginal cost of coal-fired-power production of around $30 per megawatt hour or lower. This is particularly the case for new-build renewables which have the paradoxical effect of lowering market clearing prices because of their negligible short run costs. The prospect of such a collapse in prices has an analogue in what we have seen in the recent Saudi-led onslaught against largely US-based unconventional oil and gas, and is a powerful disincentive for new investment. </p>
<p>Given a primary driver for new build is the necessity to reduce emissions, rational economists are unanimous that the most efficient mechanism to facilitate transition to a low emission generation portfolio is to appropriately price emissions. </p>
<p>While we suspect the Prime Minister really does know this, we also know he is bound by a party room that is still a long way away from abandoning ideology for rationality, on this issue at least. </p>
<p>So on this point we must acknowledge any chance for bipartisanship ends. In the meanwhile, the rest of us might contemplate whether market prices would actually be any higher if we still had a carbon price.</p>
<p>While I don’t know the answer, my suspicion is probably not. </p>
<h2>Notes</h2>
<p>[1] The request for the rule change was motivated by recent incidences of strategic late bidding by generators and purported manipulation of the market by withdrawing Queensland generation, seen by some as a market distortion accentuated by the current market structure of 5 minute dispatch intervals and the 30 minute trading intervals.</p>
<p>[2] Of course, the elephant in the room in retail electricity prices remains the distribution network. The cost we are paying for the poles and wires remains unacceptably high, especially with the cost of capital tumbling across the world.</p><img src="https://counter.theconversation.com/content/61297/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Mike Sandiford receives funding from the Australian Research Council for his geological research.</span></em></p>In case you had forgotten, electricity prices were a really big deal in the last federal election campaign in 2013, albeit often disguised under the rubric of axe the tax. Then Coalition spokesmen quite…Mike Sandiford, Professor of Geology, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.