Over the next few months, most of Australia will be receiving shocking electricity bills. The inevitable tabloid headlines employing that exact pun will only add to our suffering. The inflated power bills will be less shocking, however, for anyone who’s been paying close attention to the National Energy Market (NEM). Since the late ’90s, when Australian electricity privatization began in earnest, the NEM’s complex regulatory apparatus has routinely struggled to protect the public from the market forces it was designed to unleash.
Reliable electricity is the lifeblood of modern society, and it requires careful planning and oversight. The neoliberal transformation of state-owned, vertically integrated utilities into a disaggregated private electricity market has achieved the opposite of this. It’s also failed on its own terms — the NEM isn’t remotely close to a competitive, free market.
Instead, the NEM is a Rube Goldberg machine of tightly regulated, often oligopolistic competition. It’s an opaque system that presents a plethora of opportunities for gaming and profiteering, which flow down to the public in the form of higher power bills.
Winter of Corporate Discontent
In July, high electricity demand, unplanned outages at coal plants, and skyrocketing gas and coal prices coalesced to push wholesale electricity prices sky high. The only thing that held prices back was a $300 per megawatt hour price cap that the Australian Energy Market Operator (AEMO) imposes to protect customers from price gouging.
No profit-seeking company happily abides such a limit. So, when AEMO imposed the price cap, several power generators decided that they weren’t interested in keeping the lights on anymore and withdrew their capacity from the market.
The lobby group representing large power companies said that withdrawing capacity was a “rational commercial decision” as generators would lose money if they sold at the price cap. Ignoring the question of whether it’s acceptable to blackmail the public with the threat of blackouts, this argument also elides the fact that when generators hit the price cap, they are eligible for compensation if they are operating at a loss.
The large power generators chose to ignore this because they know that if AEMO directs them to supply electricity to avoid blackouts, they can access more appealing compensation payments. It is widely suspected that these companies artificially restricted their generating capacity to access this compensation.
In response, AEMO shut down the market for the first time since the NEM was established. For the week it was shut down, the system ran somewhat like it did prior to privatization: a central authority told generators how much electricity to dispatch and when. The only difference is that under the neoliberal market structure, the companies that ran at a loss during this period will have their costs covered through higher power bills. All up, this will amount to about $1.5 billion.
Meanwhile, based on the current outlook, Australian average electricity prices in 2022 will be the highest they’ve been in decades.
In response to the shutdown, New South Wales energy minister Matt Kean implored companies to “to do the right thing by their customers and the country.” Prime minister Anthony Albanese publicly acknowledged that “there was a bit of gaming going on” but used similarly gentle language.
Perhaps they were more strident in private. To the public, however, such gentle rebukes only reinforced the widespread image of a political class afraid to stand up to the corporate behemoths that control Australia’s electricity sector.
Tricks From the Enron Playbook
These power companies have long demonstrated a willingness to “game” the market to increase their margins.
Shortly after the shutdown, investigative journalist Michael West compared the power companies’ behavior with that of Enron, the infamous energy trading company that intentionally removed power from US electricity markets to drive up prices. At the time, the business press had lauded Enron as one of America’s most innovative companies — before, that is, its creatively engineered structure of fraud and corruption collapsed in the early 2000s.
It wasn’t the first time that Enron’s name has been invoked to describe the behavior of Australian power companies. A 2016 report by the Melbourne Energy Institute also made the comparison after looking into some of the complex mechanisms that power plant operators use to create price spikes.
At that time, generators often exploited an opportunity created by the wholesale electricity market’s bidding system. This allowed generators to bid for five-minute intervals of electricity supply while being paid the average cost for thirty-minute intervals. To achieve higher thirty-minute average payments, companies would drive prices up for a five-minute window. Then they would lower their bids for the remaining twenty-five to ensure they were dispatched. As one industry expert put it:
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.
Over the last year, the authorities finally changed the thirty-minute price settlement system to prevent these types of gaming, a reform that was bitterly resisted by large companies.
However, there are there are still many opportunities for gaming. Companies that own multiple generators can withdraw some of their capacity to drive up prices, while keeping others online to enjoy the benefits of their market manipulation. Companies can also still strategically “rebid” higher prices right up to the moment they are required to supply power. Ostensibly, this allows them to respond to issues like an unexpected breakdown. But companies with a lot of market power can simply rebid high prices knowing that no one else can fill the gap created if their offer is refused.
According to energy market expert Dylan McConnell, “A lot of gaming isn’t really illegal — it usually sits within the letter of the law but not the spirit of the law.” At the same time, he notes that many of the regulations intended to pressure companies to act in good faith are “very hard to prosecute and prove.”
A systematic look at energy market gaming in 2018 suggested that these practices potentially add $800 million annually to energy bills across the NEM. Unfortunately, McConnell points out, the market regulator doesn’t provide regular, comprehensive assessments of how much gaming is going on or how much it’s costing the public.
The Market at Work
Despite its prevalence, gaming in the narrow sense generally accounts for a smaller part of price rises than the “rational” behavior of large companies in opaque, complex, and highly concentrated markets. Although renewables are introducing more competition, in every east coast state, the two largest companies provide around 60 percent of all electricity. Large companies know what electricity demand will be and whether their competitors will be able to supply it. With this knowledge, they use their market power to jack up prices well beyond the actual cost of generating electricity.
In 2014, AGL bought two coal plants from the NSW government, giving the company control over a massive proportion of total coal-fired power in the NEM. When Victoria’s Hazelwood coal plant closed three years later, AGL started flexing its market power in this newly supply-constrained environment. According to a Victorian Energy Policy Centre report, higher prices had little to do with increased costs. AGL imposed them simply because it knew that the market operator had little choice but to accept them. The report concluded that AGL’s exercise of market power gave it a 60 percent bump in wholesale profits and raised all coal generators’ profits by almost $3.5 billion.
Coal-fired power generators can also bump up prices by “shadowing” the price of gas. Because gas is often the next-cheapest source of power generation behind coal, coal-plant operators offer to supply power at just below the price of gas. This ensures they receive the highest possible price before facing competition. It has nothing to do with the actual cost of generating coal-fired power — it’s simply an exercise of market power.
If coal-fired power stations shadow sky-high gas prices through 2022, Australians are in for a massive hit to power bills.
Large power companies have also played a significant role in shaping the rules and regulations that enable gaming and oligopolistic pricing. According to McConnell, it’s a time-consuming and resource-intensive process to engage with the various institutions that develop rules governing the electricity market and plan for different scenarios. As a result, the incumbent industry has an inherent advantage and is overrepresented in these processes, further entrenching their control over the market. Worse, in some cases, key institutions simply include incumbent energy producers as members, creating an obvious conflict of interest.
Rip Up the NEM and Start Again?
Much of the Left responded to the NEM’s meltdown by demanding the renationalization of electricity supply and distribution. When it comes to parts of the grid that are natural monopolies — the poles and wires that distribute electricity — this demand makes the most sense. Also sensible are various proposals to restructure the regulatory apparatus and to create more publicly owned zero-carbon power generation.
However, if renationalization means buying out the owners of the large fossil fuel generators responsible for recent price spikes, there are several issues that must be considered.
First, the companies that own aging coal generators might actually be thrilled if the government offered to buy them out. In fact, one of them tried (unsuccessfully) to sell a coal plant back to the NSW government last year.
Although it’s potentially lucrative for companies to stay in the market and enjoy higher prices as other coal plants close and supply tightens, this is a risky game of chicken. A generous government buyout that gives companies an easy exit is likely to be welcome. Given that coal-fired power is becoming less profitable by the year, it’s unlikely that the buyouts would actually be very generous. However, even low buyout offers might be appealing if they relieve companies of the massive financial liability of rehabilitating coal plants and adjacent mines.
Supporters of renationalizing the power plants should also consider the fact that publicly owned power generators have often been as guilty of profiteering as private companies. Commonwealth-owned generator Snowy Hydro and Queensland’s publicly owned coal-fired power stations are often cited as chronic offenders.
This said, publicly owned companies can be very responsive to interventions that protect the public. In 2017, the Queensland government instructed state-owned generators to place downward pressure on wholesale prices. Within a year, gaming had reportedly disappeared, and Queenslanders were enjoying some of the lowest electricity prices in Australia. The state government also returned some of its companies’ profits back to households through rebates.
The Problem Is Corporatization
There is a big difference between public companies that run on a market basis and publicly owned statutory authorities that are mandated to serve the public interest. In the early 1990s, Labor PM Paul Keating initiated a wave of privatizations. What’s less well known is that he forced publicly owned institutions to corporatize and work on a market basis.
University of Queensland economist John Quiggin has long advocated for renationalizing the NEM. He explained this transformation to Jacobin: “The big shift was corporatization. That means, under normal circumstances, publicly owned firms act like profit-maximizing corporations. Nevertheless, QLD generators were ordered not to game the system, something only possible under public ownership.”
However, relying on political pressure to keep prices down is only a short-term solution. The QLD Greens have previously suggested banning dividends that state-owned companies pay into state coffers and mandating that “any surplus generated by public companies must be invested in keeping power bills down.”
Quiggin’s renationalization proposal would address the NEM’s perverse incentive structure by fundamentally reshaping the way electricity is bought and sold. Instead of a spot market operated by a semiprivatized organization like AEMO, there would be a single government agency that buys electricity from generators through long-term contracts. Under this model, as Quiggin argues, “There would be no wholesale market, just a tendering process for the power-purchase agreements. Such processes aren’t immune to gaming, but there are well-established procedures to prevent it.”