Gaming of the wholesale market remains a concern

by Tony Wood

In July this year, we released a report, Mostly Working: Australia’s wholesale electricity market. This report concluded that the major contributors to high wholesale electricity prices of recent years were the closure of old, low-cost power stations and the rising cost of inputs, namely coal and gas. We also raised a concern that the current market rules allow generators in certain circumstances to make and change their bids in the market in a way that delivers highly favourable outcomes for them but not to the benefit of the market. We described this behaviour as “gaming” and recommended that the rules be changed or tightened to restrict or ideally eliminate such bidding.

On 11thOctober, as requested by the former Federal Minister for Environment and Energy, Josh Frydenberg, the Australian Energy Market Commission(AEMC) issued a report on these conclusions. It concluded that “rebidding is contributing to the delivery of efficient market outcomes but can be a problem where there is a lack of competition between generators”. They proposed that no rule changes are required and that the focus should be on policies that reduce market concentration.

We welcome the AEMC’s report and the analysis behind its conclusions. We acknowledged in our report that data access limitations would mean that our definition of gaming could include events that were consistent with an efficient market but could also could exclude the opposite. We also agree with the AEMC that market concentration can contribute to higher prices.

However, we also noted that concerns around bidding behaviour had led to a rule change in July 2016 to replace a requirement that generators bid “in good faith” to one that prohibits making false and misleading offers.  There was no reduction in price spikes due to this change and the only improvement occurred in mid-2017 when the Queensland Government directed the government-owned generators to “reduce volatility and put downward pressure on wholesale prices”.

We remain concerned that the incentives and rules in place lead to bidding behaviour that is inconsistent with a truly competitive market, ie lowest prices for consumers. Market power can arise and be exercised in relatively transient circumstances, such as a combination of high demand and outages of local generation or interstate transmission. Furthermore, concentration is a feature of the energy market that is likely to persist due to economies of scale which lower costs and provide effective risk management. Therefore, rules that are designed to reduce the impact of concentration on prices are likely to be more effective than rules to limit concentration.

The action by the Queensland Government does not solve the underlying problem and it could emerge in other states if transient market power opportunities emerge as the structure of the generation sector changes to include an increasing share of wind and solar power and greater dependence on transmission.

Finally, we note the Commonwealth’s support for the recommendation from the ACCC’s recent report on electricity affordability to give the Australian Energy Regulator powers to identify and remedy market manipulating behaviour. We are optimistic that our concerns will be addressed through the creation and exercise of these powers.

Read the report

For further enquiries: Tony Wood, Energy Program Director
T. +61 (0)3 8344 3637 E. media@grattan.edu.au