AGL Energy has found a silver lining in the hot weather Adelaide has faced this year. The company is reported to have made an extra $60 million in one two-week period alone.
Although about 20 electricity generators compete in the national market, transmission shortages can isolate state-based markets. This can leave one company in a position to increase prices when demand surges, and South Australia is particularly vulnerable.
During the past few months, South Australia has experienced high temperatures and record electricity demand. At the same time, its reserves have deteriorated. The main link with Victoria has been downgraded because the network owner considers it susceptible to breakdown if it operates at its nominal capacity of 500 megawatts (enough to supply 35% of the South Australian baseload market). This decreases the amount of electricity available in the state.
In addition, a big increase in wind power in South Australia means it requires fast-start generation when the wind stops blowing. This tends to be when it is hot -- the very time, given the air-conditioning load, that more power is needed.
The two big electricity retailers are Origin Energy and AGL. They have solid coverage in forward contracts so they are relatively indifferent to the daily spot price for supplies.
But AGL, following asset swaps with TRUenergy, is now ''overweight'' in generation and has most of the state's fast-start gas-fired plant. It has therefore been bidding into the market in ways that maximise its generation revenue by raising the daily price.
Usually such tactics backfire as rival suppliers move to take advantage of an impending price spike. This suppresses the spike and leaves the company engaging in such bidding with lost markets. But in South Australia, AGL has benefited from high temperatures, reduced Victorian supplies and its own surplus capacity.
This year, to date, the average spot price during peak periods in South Australia has been $350 a megawatt hour compared with $55 for Victoria. Normally, South Australian and Victorian prices are similar.
The effect is limited to those retailers and individual businesses that do not hold adequate futures contracts. All domestic users are automatically contracted because they buy from a retailer. Grumbles are coming from those businesses that have copped a hiding because they found themselves inadequately covered for their forward needs in South Australia. The Australian Energy Regulator is, as required, examining the actions of generators and transmission suppliers to determine whether they are flouting market rules. This is unlikely and any intervention would almost certainly do more harm than good.
The episode illustrates that the market structure (other than the regulatory encouragement of wind power) is working well. Those companies that gamble on the prices being lower than those being offered at contract can lose. For the market as a whole, the high prices in South Australia are leading several companies to dust off their previous plans for additional generation.
The cavalry, in the form of new supplies, is therefore on the way but until it arrives, those electricity users with inadequate contract cover can only pray for cooler weather.
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