Market power in the market for power?

After a mild summer contributed to the lowest Q1 prices in the NEM since 2012, concerns about price spikes are suddenly back on the agenda. All mainland regions of the NEM have seen significant price volatility in the last couple of months. Clearly a factor is the tightness of supply due to outages and reduced operations at plants like Callide in Queensland and Yallourn in Victoria (as covered in previous blogs).

This has resulted in the resurgence of a perennial worry – how can the price suddenly move from $30-40/MWh to $15,000/MWh? The latter is clearly well above any generator’s cost of supply. Doesn’t this mean there’s some sort of market manipulation going on? Some parties certainly think so. Small retailer Enova has lodged a complaint with the ACCC based on its observations of peaking gas plant behaviour in NSW in May. It believes that some plants were withholding supply.

The plants and their owners aren’t named, but Snowy Hydro chief executive Paul Broad got a grilling at Senate Estimates last month over the availability and bidding behaviours of his Colongra gas plant. Snowy is of course now set to build another gas plant at Kurri Kurri, which federal energy minister Angus Taylor has trumpeted as a great price saver, so it’s unsurprising that Labor and independent senators took the opportunity to question whether this would happen, or whether this would just consolidate Snowy’s market power. The Snowy executives patiently explained that their decisions on how to bid their portfolio are affected by a range of physical and financial factors, including transmission and energy constraints and availability of water (for their hydro portfolio, which is the majority of their capacity) and availability of gas, as well as the need to manage against their contract position and their retail load. Nonetheless the apparent decision to bid plant in at the market price cap of $15,000/MWh on days when there were forecast to be shortfalls raised many Senators’ eyebrows.

The dynamics that drive price spikes – especially outside of heatwaves – are complex and not easily reduced to clear proof of bad behaviour by generators. Detailed analysis by market expert Allan O’Neill of a recent set of price spikes in Queensland identifies multiple factors including:

  • Short-term forecasts of lower renewables
  • Limitations on the ramp rates of gas-powered generators that are seeking to fill the gap left by declining renewables output
  • Frequency control (requirements) that need to be met by Queensland generation (due to transmission constraints) that limit the ability of NSW generation

Several of the price spikes were for a single five minute dispatch interval, usually at the start of a half hour settlement period. What is happening here is that the five minute price spike induces generators to reduce their bids and get dispatched over the subsequent 25 minutes so they can share in the high price, as the settlement price is simply the average of the 6 dispatch interval prices. This kind of outcome can make consumers suspicious of whether the initial price spike was deliberately engineered to create this revenue opportunity. A counterargument is that if it was that easy to manipulate the price in this way, it would surely happen a lot more frequently. Regardless of how the initial price spike is caused, this kind of outcome will disappear in October, when the NEM moves to five minute settlement. The downside risk is that the current approach provides a strong incentive for generators to pile in and drive the dispatch right down. This incentive may disappear under five minute settlement, especially since it can take more than five minutes to ramp up. This is where batteries have a key advantage, and market watchers will be keen to see how bidding dynamics change under five minute settlement.