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South Australian power: pay most to buy, or most to supply. Why?

By Geoff Carmody - posted Tuesday, 20 February 2018

South Australia mostly has our highest power prices. SA generators can also actually pay most to supply power. How come?

The National Electricity Market (NEM) supply bidding rules set a power price cap, and a price floor:

The National Electricity Rules stipulate a maximum spot price of $12,500 (now $14,200) per MWh which is the market price cap and a minimum spot price of minus $1,000 per MWh which is the market floor price. This negative market floor price allows generators to pay to stay online when the cost of staying online is lower than the cost of shutting down and re-starting their plants. For a renewable generator, staying online may also cost less than what generators receive from support mechanisms like the Renewable Energy Target scheme, plus their own costs.

[How the energy market operates, Energy Exchange, parenthesis added.]


At the cap, most generators make a good return for the (usually very short) period for which that bid is accepted by the Australian Energy Market Operator (AEMO). At or near the price floor, for very short periods, all generators pay the AEMO to supply power.

You can track National Electricity Market (NEM) wholesale electricity prices every 5 minutes. There's an app for that. I've noticed patterns in NEM state-average power prices this summer. My friend says I probably should get out more:

  • Barring an east coast heatwave, prices are usually lowest in Queensland and NSW, higher in Victoria and Tasmania.
  • If not always, power prices typically are highest in SA.
  • This summer, I've briefly seen SA power prices at the $14,200 cap. Victoria got close to that. Tasmania got up there, too.
  • Also this summer, I've seen average power prices in SA at the -$1,000 floor. I've also seen negative prices in Tasmania.

So, especially in SA, power customers can pay most to buy, and sometimes power generators can pay most to supply. I don't understand these patterns, especially for the NEM power price floor in SA, and also Tasmania to some extent.

OK. Short term demand is price-insensitive. We want reliable power now. We'll worry about the bills later. Supply is also pretty inflexible in the short-term. We have to make sure we have enough and be able to turn it on or off at a moment's notice. Prices bounce around between the floor and the cap as AEMO tries to balance demand and supply and 'keep the lights on'. I get that. That said, I see no reason why the NEM should have either a price cap or a price floor (negative or not). If we're trying to balance demand and supply power quantities, why not let unfettered bidding prices reveal them? That's a question for another day.

Given the price cap and floor, why does SA manage to hit both? The cap, maybe, is understandable. SA has the costliest power, most of the time. But why the negative price floor? The National Electricity Rules' minimum negative power price (sort of) makes sense. Fossil-fuel base-load generators (eg, older coal-fired plant) need time to start turbines up or shut them down. Wear and tear costs must be minimised. Not shutting down, and paying AEMO for power supplied, might be cheaper if the avoided marginal shutting down costs exceed the negative wholesale floor price. I get that bit. But, on this reasoning, why wouldn't the price floor be seen more in Victoria, NSW and Queensland? These are the states most heavily reliant on coal. Is it because the closure of coal-fired generators means overall grid supply in these states now is much 'tighter' relative to demand? Maybe excess supply in these states is now history?


For gas-fired 'peaking' plant, I don't think this price floor argument applies. It's not called 'peaking' plant for nothing. It's meant to be supplied at times of peak demand, and then shut down. I can't see how this rationale applies to renewables, whether solar, wind or hydro, either. They're uncertainly intermittent anyway, because weather-dependent renewable fuels aren't always 'on tap'. For hydro, it's because it's also 'peaker' generator power, meeting demand spikes, and then shutting down.

The SA government has done a 'good' job of demolishing SA's coal-fired generators. It uses lots of brown coal – indeed, after demolishing its own coal plants, now even more? But it sneaks brown coal power across the border from Victoria via the Heywood interconnector. It's not been friendly to local gas power plants, but uses gas a lot. Concerned about collapsing reliability, it has re-discovered old energy friends in 'liquid fuels'. Translation: huge imported diesel generators. It has punted heavily on solar power, and, more so, on wind power. These stop and start all the time. Daily, for solar. When the wind stops, for wind farms.

SA has the highest wind power share in its generation mix (when the wind's blowing). Tasmania has the highest hydro power share. These States approach, or hit, the NEM bid price limits (the cap or the floor), on an average state-wide basis. Others don't, as much.

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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