As ever, price control reduces the supply

The high price of inputs such as coal is making electricity generation more expensive  -- meaning that  generators need to charge more to recover their increased costs.  But making electricity more expensive is deeply unpopular so Australa's brilliant bureaucrats capped the amount generators can charge for their product  -- price control.

So to protect their income the generators have been reducing their output to a bare minimum.  Doing that also breaks the price caps so it is a stoush between the bureaucrats and the generators  -- with the public at risk -- being faced with blackouts

Power generators are exploiting the chaotic energy market by withdrawing power supply from the electricity grid and waiting until strict rules to prevent blackouts kick in, forcing the energy market operator to direct them to fire their plants back up and triggering profitable compensation payments.

There’s no law stopping power companies from withdrawing their electricity generation from the market, and in the past two days they have reduced the volume available by 2 gigawatts in Victoria, 3 gigawatts in NSW and 1.5 gigawatts in Queensland.

The withdrawals were prompted by the Australian Energy Market Operator’s (AEMO) decision to put a cap on spiralling prices that electricity generators are charging for wholesale power, which crimped the profit margin of some generators, which are battling coal prices that are soaring because of sanctions on Russian exports.

But the electricity market is tightly regulated and AEMO has powers, designed to prevent blackouts, which enable it to force generators to fire up units and start supplying electricity to the grid. Whenever AEMO does this, companies are awarded compensation.

AEMO was unusually forthright in a public statement yesterday when it said that directly after price caps were imposed on power companies “available offers were reduced”.

These withdrawals represent more than 10 per cent of the east coast energy grid’s total generation capacity of 55 gigawatts and come on top of an energy crunch created by a series of breakdowns and maintenance outages that have forced about one-quarter of the east coast’s coal-fired power stations out of action.

Melbourne University energy expert Dylan McConnell said while power companies may have reduced their output for legitimate reasons, the scale of withdrawal across the industry raised concerns over its social licence.

“It’s not in good faith and fairly unconscionable conduct. Yes there is some sort of justification for it, but it’s the wrong thing to do,” McConnell said.

Federal Energy Minister Chris Bowen was asked on Tuesday if power companies were gaming the system and said the compliance regulator was monitoring the situation “very, very closely”.

“The Australian Energy Regulator reminded [power companies] of their obligations of the law this morning,” Bowen said.

The market regulator has reassured ministers that it believes there is still sufficient power available to the grid – but it’s likely that power companies will continue to be directed to switch their units back on, triggering more compensation payments.

“I have been in contact with [AEMO] and they are confident the situation can be and will be avoided in NSW and Victoria in particular in coming days,” Bowen said on Tuesday. “Nobody should turn off any power usage that they need for their comfort or their safety ... nobody is asking for that to happen.”

A spokesperson for the Australian Energy Council, which represents major power generators including AGL, EnergyAustralia and Origin, said its members faced a “complex issue” but were seeking solutions to the power crunch.

“The price cap unintentionally means that some plants can’t recover their fuel costs. Participants are legitimately seeking ways to resolve the problem,” the spokesperson said.

NSW Treasurer and Energy Minister Matt Kean said he was in close contact with AEMO and had “every confidence” there was enough power available to avoid blackouts, and he identified compensation payments as a cause of shortfall warnings that had sparked concern.

“The reason that generators are waiting for the market operator to direct them, rather than taking a loss in the market is because they are eligible for some compensation from the Australian Energy Regulator,” Kean said.


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