BILL: Reducing price-fixing in the gas market

Today, in responding to the Government's Bill, Mark noted that whilst an aim of the Bill is to reduce price-fixing that impacts on the end users of gas, it does absolutely nothing to prevent price gouging and the manipulation of the market by gas companies that are also generators of electricity.

National Gas (South Australia) (Capacity Trading and Auctions) Amendment Bill 2018

There is a national regime for both electricity and gas on the eastern seaboard. When legislation is to be changed, when rules are to be changed, South Australia, under the cooperative arrangements, is the lead legislator, so this bill before us now is effectively for the whole of the Eastern States' gas market. The bill implements the outcomes of a review of the east coast gas market which was undertaken by the Australian Energy Market Commission over the last three years.

The bill is aimed at increasing competition and reducing price-fixing. They are noble objectives and they are fairly unexceptional in this privatised gas regime. I understand the gas network has always been in private hands in this state, as opposed to electricity which was in public hands for most of the last century. I also note that, whilst an aim of this bill is to reduce price-fixing that impacts on the end users of gas, it does absolutely nothing to prevent price gouging and the manipulation of the market by gas companies that are also generators of electricity.

In July this year, the Grattan Institute published its report, entitled 'Mostly working: Australia's wholesale electricity market'. The report by Tony Wood and David Blowers states:

Wholesale electricity prices rose across [the] National Electricity Market (NEM) by 130 per cent between 2015 and 2017.

The price paid for electricity traded in the NEM also more than doubled from about $8 billion to $18 billion, and household bills increased by up to 20 per cent in 2017 alone, but it is impossible for governments to fix the problem because most of the price rises have been caused by issues beyond their control. According to the Grattan Institute, there are three issues which caused the price rise. The first one was the closure of the big, old but low-cost coal-fired power stations. They were low cost to operate, especially without a price on carbon, but they were incredibly expensive to maintain and they became uneconomic.

The second trigger was the price of key inputs, and that is where this is relevant to this bill because the price of gas as an input rose just when the plants that they fuel were needed more often, because of the closure of coal, and that pushed up prices even further. According to the Grattan Institute, that accounts for 40 per cent of the increase in electricity prices. The third issue that they raised is that the major electricity generators were gaming the system. They were using their power in concentrated markets to create artificial scarcity of supply and so force up prices.

Gaming has mainly occurred in Queensland and South Australia but there were also signs of it in Victoria, especially since the closure of Hazelwood, and New South Wales looks to be next. Gaming has been part of the market for many years, and it appears that it is allowed by current market rules, but it is estimated to add as much as $800 million to the price paid for electricity that is traded in the National Electricity Market in some years and the Grattan Institute recommends that the rules should be changed. Well, here we are changing the rules, but we are not changing the right rules if we are to deal with this problem.

Another very influential commentator, someone who has the most in-depth understanding of energy markets and how they operate, is Giles Parkinson, editor of RenewEconomy. On 13 September this year, he stated the problem this way, and he does not mince his words:

The Australian Energy Regulator has confirmed the outrageous gaming of wholesale electricity prices in South Australia in early July, when the big generation companies jacked up their prices when the main link between the state's grid and Victoria was heavily restricted by maintenance work.

A report from the AER was released late Friday, and confirms RenewEconomy's contemporaneous observations that the market was being gamed by the generators on July 9, resulting in a six-hour period where prices averaged more than $600/MWh, a three hour period when prices averaged more than $1,200/MWh and one period where the price was more than $8,800/MWh.

As the AER notes, these prices had absolutely nothing to do with the cost of generation, or the lack of supply, or peak demand. It occurred because the market players sensed an opportunity to fill their pockets, and struck—as they have done on so many occasions over the past decade and more…

Parkinson goes on to say:

The chief tactic of these market players, notes the AER...was to take advantage of Australia's 30-minute settlement rules, which do not align for the dispatch period, which is every 5 minutes.

This presents an irresistible opportunity for the generators to take advantages of network restrictions, or other constraints, to bid very high prices for one 5-minute period, so guaranteeing a high price for the entire 30-minute settlement period (where the price for the 5-minute periods are averaged out).

Having set a ludicrously high price in one five-minute period, the generators then bid low—and often to the price floor of minus—

that is, minus—

$1,000/MWh—to ensure that their generators share in the spoils.

This created an extraordinary scene on July 9 where the price repeatedly lurched from more than $10,000/MWh to minus $1,000/MWh over successive 30-minute periods as the gaming—which is not illegal, and is admired by the ACCC chair Rod Sims as the 'market at work'—went ahead in full view.

The obvious point to make there is that the generators we are talking about are mostly gas-fired power stations. These are the big gentailers: they produce gas, they sell gas and they burn gas in their own gas-fired electricity generators. Parkinson describes the gaming of the system like this:

It's like going to the farmers' market and asking for a dozen eggs. Half of them are priced at 50c each, but the other six are $50 each—but you can only buy a dozen—so that will be $303 please. The generators pocketed an extra $20 million that day from South Australia alone.

Twenty million dollars, pocketed through gaming, largely the result of work of the gas companies. Parkinson goes on:

The AER didn't say it (in fact, the tone of the report seems at some points to be admiring of the generators' restraint), but I will: It's a bloody outrage.

It is exactly the sort of behaviour that big energy users such as Queensland zinc refiner Sun Metals—way back in 2015—sought to stamp out by requesting a change to 5-minute settlement periods.

Despite the support of other big energy users, the Australian Energy Market Operator, and numerous independent analyses pointing to the continued gaming, the market rule-maker, the Australian Energy Markets Commission, took several years to assess the request, and then delayed implementation until 2021.

Parkinson goes on to say:

The big energy users have helped propagate the nonsense that much of the cause of high wholesale prices in the Australian grid is the fault of renewables, when most observers point to the gaming.

The relationship between these incidents that I have just outlined and this bill is effectively a missed opportunity. I am not saying that the Greens will not support this bill. We know from previous experience over the last 12 years that these national schemes are rarely open to review. Neither Liberal nor Labor has moved or supported a single amendment to any national electricity law, which I will say is in many ways an abrogation of responsibility by this parliament. It is effectively handing over the rule making to the executive—or to the executives, I should say, because these things are hashed out at meetings of ministers. It does really make the role of the parliaments redundant and pretty much irrelevant.

In the early days I used to move amendments to these bills; I soon learnt that none of them were ever going to find any favour with anyone. So a majority of members of this parliament are happy to hand over their responsibilities to the executive. I do not think that is the way our democracy should work.

I will also, just by way of conclusion, say that this bill does nothing to stop the uncompetitive behaviour of gas companies in relation to domestic connections. Yesterday I introduced a bill to deal with the behaviour of property developers in cahoots with gas companies to mandate the connection and use of gas in new housing developments. It is an absolutely outrageous proposition that, if you buy into a new housing estate—a young family, for example, entering a contract for a house and land package—you are obligated to connect to gas and obligated to use gas at least to heat your home and your hot water supply.

I am disappointed that these national energy laws never really get to the heart of the problem, in particular the gaming by gas companies and gas-powered generators of electricity. Whilst these laws do not deal with those problems, the Greens will not stand in the way of these current national reforms going through, so we support the second reading of this bill.