Power Engineering - Report accuses Australian generators of market manipulation

28 July 2003 - Australia's electricity generators are earning nearly 30 per cent of their revenue from artificially manipulating the wholesale market, according to research due for release today. The analysis comes as state governments are trying to stamp out "gaming" of the electricity market that artificially inflates prices.

In Melbourne today, senior representatives of the electricity industry will attend an Australian Competition and Consumer Commission forum designed to explore the industry's use of its market power within the National Electricity Market.

Under ACCC rules, electricity generators can bid up to A$10 000 ($6635) a megawatt-hour to supply electricity in half-hour blocks. The average price of producing electricity in the key states of Queensland and NSW is less than $35 a MW/hr.

Generators defend their use of the ACCC price cap as a means of securing an adequate return on the billions of dollars invested in generation capacity.

Research by Bob Booth, a long-time critic of the electricity pool system that forms the backbone of the NEM, shows that last year 28.4 per cent of pool turnover was provided by price spikes.

The situation was worst in Queensland where generators earned 41.6 per cent of their turnover from spikes.

The proportion for NSW generators was 30.1 per cent, Victoria 17.8 per cent and South Australia 17.3 per cent.

Dr Booth said yesterday that most of the price spikes were not related to any shortage or imminent shortage of capacity but rather "created by generators bidding and rebidding to withdraw capacity from the market, either physically or by not starting units, economically, by bidding their capacity at very high prices".

Dr Booth said up to 28 per cent of annual pool revenue was due to price spikes that were essentially artificial and quite unrelated to the supply/demand balance.

While gaming has little direct result on retail prices in the short term, by artificially increasing the average wholesale price of electricity over time it affects the prices at which retail electricity companies contract to buy supplies.

"Clearly there is insufficient competition in the generation sector of the NEM since it is all too easy for generators and traders to manipulate the pool price," Dr Booth said.

He argued that the situation would not be allowed in other competitive electricity markets around the world.

"Australians did not expect that the prices in the so-called competitive NEM would be set at the whim and fancy of the generators alone, but that is the situation."

Dr Booth used his research to call for fundamental change to the NEM trading system. "The theoretical underpinning of the design of the present NEM trading system relies on the key assumption that there is a sufficient number of independent generators operating in the mandatory pool to deliver workably competitive outcomes," he said.

Australia had only 16 independent owners of significant generating capacity, which was clearly not enough to deliver real competition.
The Australian

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