Earlier this week, Bruce Mountain from the Victoria Energy Policy Centre (VEPC) released a working paper focusing on market outcomes following the closure of Engie’s Victorian Hazelwood Power Station in 2017.

The paper makes observations around changes in capacity and price bids in the lead up to, and following the closure, attributing this to an exercise of market power by AGL.

AGL takes the rules and regulations applying to its wholesale and retail businesses seriously and is concerned about the paper’s allegations, which are made through the selective use of information and data and without recognition of the full factual context. Both the Australian Competition and Consumer Commission (ACCC) and Australian Energy Regulator (AER) have conducted regular and lengthy reviews into the market using their extensive information gathering powers. AGL has cooperated with both regulators and, in the course of these reviews, AGL provided thousands of documents, including documents containing highly sensitive market information. Neither regulator identified any misuse of market power, or behaviour that’s within the rules but harmful for the market.

Looking at the VEPC paper, there is an alternative reading for much of what it relies upon in drawing its conclusions. For example:

Loss of a major low-cost generator increases pressure on the remaining generation fleet

The paper heavily emphasises the fact that coal capacity in NSW was repriced into higher price bands following the announced closure of Hazelwood.

Hazelwood during its last years of operation was supplying approximately 10 TWh of energy; that’s 20% of Victoria’s energy requirements, or 5% of energy in the National Electricity Market (NEM). It followed the closure of over 3,000 MW of other coal-fired power stations across the NEM.

Given that customer demand for electricity remained unchanged before and after Hazelwood’s closure, the rest of the NEM’s generators needed to lift their output.

Renewable generators are limited by the wind, sun and water resources available to them. While the growth in wind and solar investment has been remarkable, it is not yet enough to replace the energy from coal generator retirements over the past decade.

Gas-fired generators are facing unprecedented high fuel costs, and lift production only when the price of electricity justifies these costs. As a result, the coal generation fleet has been called upon to lift production to meet customer demand.

Since the closure of Hazelwood, AGL has lifted production at AGL Loy Yang, with close to 99% utilisation of available capacity. However, at Bayswater and Liddell, coal delivery constraints have limited our ability to increase, or even maintain, production.

Maximising output when it is needed most

The paper also comments that Bayswater and Liddell concentrated output during daily peak demand periods but reduced this overnight and in the middle of the day. These are the times when demand, and therefore the spot price of electricity, is generally lower – this is because solar output is at its greatest in the middle of the day.

When coal supply is constrained, aligning output with the times of day it is needed most reduces reliability and price risks. The report acknowledges that Bayswater and Liddell output during higher demand periods remained consistent before and after Hazelwood’s closure.

Looking at AGL’s portfolio response, it is noteworthy also that the relative reduction in output from NSW generators was filled through increased output at Loy Yang, as well as by deploying gas and renewable generation. AGL’s total generation output has been stable for three years with 45.8 TWh in FY16, 45.4TWh in FY17, and 45.5TWh in FY18.

But how real were these coal constraints?

The paper briefly contemplates – but quickly dismisses – the potential for Bayswater and Liddell to be materially affected by coal constraints. It does this while simultaneously acknowledging that it is not possible to know this with certainty, without access to confidential information provided to the AER and ACCC. The authors, however, did not seriously engage with AGL to understand the real issues prior to conclusion of the report.

These coal constraints were very real and related to difficulties with rail haulage, conveyor breakdowns, coal supplier issues and a limited coal stockpile.

In fact, the coal stockpile had declined by about three quarters between the time of AGL acquiring Baywater and Liddell and the announcement of Hazelwood’s closure. At the lowest point in mid-2017, the stockpile was at a level which would only have enabled about four and a half weeks’ worth of production. Bayswater and Liddell have been without coal deliveries for up to two weeks in the past. If a failure like that occurred with only four weeks’ worth of coal available, customer supply would have been put at risk.

AGL voluntarily provided details of coal deliveries, prices and stockpile levels to the AER in October 2017 when the AER was tasked by Minister Frydenberg with investigating market prices and participants’ bidding behaviour. The AER’s report states, “Confidential information coal generators provided to the AER during our review confirmed statements in the media that stockpiles were significantly lower than historic levels*.”

Since 2017, AGL has spent over $14.5 million improving our coal infrastructure at Macquarie to reduce disruptions attributable to our own infrastructure and is actively working with our coal suppliers and hauler to improve deliveries.

Is the market broken?

The supply-demand balance in the NEM is certainly tighter since the closure of Hazelwood and there are higher spot prices. But that is a predictable outcome of the closure of a power station given the way the market is designed.

The NEM is an ‘energy only’ market, and it is a design feature that wholesale prices are intended to rise as the supply and demand curve tightens. As the AER has noted:

Periods of high prices are expected in the market, particularly during periods of tightening supply or increasing fuel costs. High prices can signal efficient investment in new generation capacity. Problems can arise however, if high prices are sustained but there is no new entry due to high barriers to new investment**.

Prices are designed to rise in these circumstances to signal the need for new generation to enter the market and to allow associated build costs to be recovered. Without this signal, there may be insufficient incentives for investment and project developers would face additional challenges obtaining necessary finance.

But there is more to it. In the transforming energy system, it is not only energy that must be valued, but also attributes which keep the system in secure operation, attributes which provide a reliable service and attributes which move towards a lower emissions future.

What is the right market framework to achieve all these outcomes? This has been a heavily contested question – at a political level, among academic circles and within industry. Not knowing the rules of the game which will apply five to ten years from today is muting the expected response to investment signals.

At the request of the COAG Energy Council, the Energy Security Board has now embarked on a piece of work which attempts to answer this question, in the context of Australia’s National Electricity Market. AGL is extremely supportive of this key policy initiative, and we look forward to engaging with the ESB and all energy market stakeholders in this critical piece of work.

*AER Electricity wholesale performance monitoring NSW electricity Market advice, December 2017, p 18
**AER electricity wholesale performance monitoring Hazelwood advice, March 2018, p 2