How energy crisis surged through national grid

The collapse of a gas retailer to big industrial customers set off a chain reaction that has led to what could be a harsh winter for energy users amid high electricity prices.

Minister for Climate Change and Energy Chris Bowen at a meeting with state and territory counterparts on June 8 to address the energy crisis. Picture: AAP

Garbis Simonian first started to get nervous on April Fools Day when, on a cool Friday morning, AGL Energy closed the first unit of its Liddell coal plant in NSW.

Even though AGL had given an ample seven-year warning of the closure, it still played on nerves across an energy sector that had grown used to falling wholesale power prices in the ­national electricity market.

And Simonian had more to lose than most. He had built up one of Australia’s biggest independent gas retailers, Weston Energy, with more than 400 companies and government agencies on his books servicing more than 1100 factories.

Crucially, Weston purchased the bulk of its gas on the spot market. Most big energy users can manage their exposure to wholesale power price spikes by entering hedge contracts that lock in firm prices or signing up to contracts at a specified rate.

But Weston – and its large customer base – chose to ride the swings of the market. Relatively stable wholesale energy prices over the past few years meant businesses like Weston were on a solid footing. But Simonian said that all started to change once outages started piling up at coal plants, responsible for 60 per cent of supplies for the national electricity market.

“I knew we were in for trouble when operators started shutting the coal-fired power station cap­acity,” Simonian tells The Weekend Australian.

“They made up the shortfall in electricity with gas peakers, which increased the demand for gas. We said, ‘Christ if that’s happening when the weather is mild, imagine what’s going to happen when the weather drops’. And then the icing on the cake was when the weather got really cold. Demand skyrocketed and that really stuffed the market.”

Spot gas prices, trading at less than $10 a gigajoule in the early months of 2022, skyrocketed to more than $40 a gigajoule by the third week of May.

For the Sydney-based Weston, it sparked a desperate – and ultimately unsuccessful – race to remain trading. While Simonian says it was still profitable, it ran out of money to meet the required cashflow needs demanded by the market operator.

“When gas prices jumped into the $40-plus levels, that’s when we knew we were in trouble. We knew we couldn’t continue. By May 23, we informed the Australian Energy Market Operator we couldn’t continue.”

Weston, which started in 2016, had built a sprawling list of clients with customers dotted through NSW, the ACT, South Australia, Victoria, Tasmania and Queensland. That meant when the firm suddenly collapsed, the fallout spread far and wide.

The big electricity retailers received an emergency phone call on that Monday morning to act as a retailer of last resort in response to Weston’s impending shutdown. The scheme is designed to ensure customers can keep receiving gas and electricity in the event a retailer collapses.

While the “last resort” scheme worked by ensuring no customer went without gas supplies, chaos quickly enveloped the market.

The manufacturers – representing 7 per cent of the east coast’s commercial and industrial market – that relied on Weston for supplies started complaining they may be forced to close operations after being offered gas prices more than four times normal rates under the emergency set-up.

With more than a quarter of coal capacity including some of Australia’s largest power generators out of service or undergoing maintenance, pressure was growing on the market. Near record international thermal coal prices also led to the fossil fuel supplying less of the national electricity market than usual.

The Ai Group, which represents Australian industry, called Weston’s collapse a warning sign on energy costs. Manufacturers that are due to roll off contracted prices face a difficult winter ahead.

“Just had a kind of heartbreaking conversation with a medium-sized business whose gas retailer collapsed,” Tennant Reed, Ai Group’s energy expert, said on Twitter. “The personal toll of anxiety and uncertainty that these people are facing is pretty intense. More and more will be in the same boat as contracts roll off.”

Back in the market, day after day of high prices had market bodies scrambling. A week after Weston’s demise, gas price caps were introduced in Melbourne after a price threshold was hit. The following day the cap was extended to Sydney and Brisbane after wholesale prices soared to more than 80 times normal levels.

TasGas, the Tasmanian retailer with 43,000 commercial and residential customers, said the company began encouraging its customers to move away from a reliance on spot contracts late last year, amid expectations of a volatile gas market.

Chief executive Phaedra Deckart said she hoped the ACCC review of recent energy prices would include looking at the role played by some energy brokers in the market, and not just review the actions of big generators.

“There have been a number of brokers in the market encouraging customers to take exposure to spot prices – I don’t think all of those customers necessarily understood the risks they were being exposed to,” she said.

Former Energy Security Board chair Kerry Schott said low wholesale power prices – and the lack of a market-based capacity mechanism such as the one included in the former federal government’s abandoned National Energy Guarantee – had led to smaller retailers and customers assuming they could use the spot market to cover their future energy needs.

“What we have seen, regrettably, is some of the small retailers have been covering their load by going to the spot market to buy it, and that works fine when the price is low. But as we’ve seen when it’s very high, it causes them to get into all sorts of financial strife,” Schott said, speaking at the Australian Energy Week conference in Melbourne.

Householders and small businesses that deal with the big retailers who control their own gen­eration capacity will not see any immediate increase in their bills.

But amid soaring fuel prices and rising costs across the economy, they face months of uncertainty about the true size of their future power bills or, alternatively – if they have not been paying attention to recent news – the prospect of a nasty shock later in the year when the bill for winter heating arrives.

Customers from both big and small retailers can expect rampant bill inflation.

Thousands of households were slugged with a doubling of power prices after smaller retailers passed on surging costs, sparking fears of small operators collapsing from volatile market conditions.

And millions of households will now be slugged with an increase in their power bills of up to $268 a year from July 1 after Origin Energy on Friday increased its prices for the 2022-23 financial year. NSW households will pay an extra $268 for their power on average based on a variable tariff, marking a 14.4 per cent increase on the current year.

Queensland customers will see bills increase by an average $223, or 13.7 per cent, with South Australia consumers facing an extra $180 annual slug, up 10.4 per cent.

Origin, which has 4.2 million electricity and gas accounts, is the first major player to move amid a national energy crisis of high ­prices and tight supply.

East coast energy users need to get used to wholesale gas prices remaining high for years to come, the Ai Group’s Reed says.

A new gas price limit was imposed on the Sydney market on Wednesday and prices in Victoria remain capped.

“International gas prices look like they’re going to be under extreme pressure for a long time to come,” Reed told the Australian Energy Week conference.

The first week of June saw more drama with AEMO triggering an emergency supply guarantee mechanism on gas producers for the first time since it was introduced in 2017.

While producers responded with enough gas supplies to avoid a shortfall, it underlined the severity of the situation for incoming Energy Minister Chris Bowen.

It also called into question whether existing options available to the federal government, including the gas export trigger, were the right tools to rebalance the market.

The opening week of winter failed to provide any respite – if anything, the situation has only got worse.

AGL suffered a further plant outage at Liddell a week ago and on Friday the nation’s energy crisis deepened after the power giant lost half its capacity at the Bayswater coal plant, the second largest power station in the national electricity market, while a breakdown at its Victorian Loy Yang A facility could take an extra two months to fix.

Simonian has been a high-profile advocate for developing new sources of gas including Santos’s Narrabri project in NSW, and is concerned the state has to import 95 per cent of its supplies. But any short-term fix for the market appears some time away. And winter could be even more bracing than the last few months.

“This winter? I think it will be terrible because the more coal is out, the worse it will be,” he says.