Power generators in push to raise price caps in national electricity system
Power generators are devising a plan to raise price caps in the national electricity system to avoid a repeat of the market suspension and ease an ongoing energy crisis.
Power generators are devising a plan to raise price caps in the national electricity system to avoid a repeat of the market suspension and ease an ongoing energy crisis.
Regulators imposed an administered price cap of $300 per megawatt hour for the first time a fortnight ago, in a bid to calm a volatile market after a period of unusually high wholesale prices.
However, the cap resulted in more than 10 per cent of supply being withheld because companies could not profit on high-cost generation and feared running out of fuel. That supply standoff led to the Australian Energy Market Operator suspending the market.
Sources said generators were privately discussing pushing for a doubling of the price cap to $600/MWh to enable sufficient supply.
An approach could be made to ask AEMO itself to request a quick change to the rule, and the issue may be raised with state and federal energy ministers ahead of their next meeting on July 20.
The industry was discussing how to fix the market price problem, energy market consultant Paul McArdle said. “I can understand the reasons why they are looking at this now,” said Mr McArdle, managing director of GlobalRoam. “It’s based around $300/MWh not covering their costs and it may be worth looking at doing something temporarily.”
Gas-fired generators recently needed a price of $500/MWh to turn a profit given soaring spot prices for the fossil fuel, sources said, illustrating why some withdrew rather than supplying the market at a loss at $300/MWh levels.
Still, the optics of generators pushing for a higher cap at a time of soaring household power bills may prove problematic. The price of intervention and finding emergency supplies to avoid blackouts in the last few weeks could add $1bn of additional costs, experts estimate.
Anthony Albanese has accused generators of “gaming the system” during the crisis, and companies were warned by the Australian Energy Regulator to not withhold supply as a suspension of the market was lifted on Friday.
States such as Victoria may also be reluctant to back a rule change that could be seen as locking in fossil fuel generation such as gas peakers, which were among the energy sources held back from the market at the $300/MWh cap. An investigation into the market suspension has been announced but Energy Minister Chris Bowen said other industry issues were more pressing than lifting the price cap for generators.
“Energy Ministers, AEMO and the AER are all currently looking into the drivers behind the energy market situation and pricing behaviour over recent weeks,” a spokeswoman for Mr Bowen said.
“What we know already is that failure of generators, flooding in mines, a disgracefully neglected grid and policy chaos are some of the key causes. Higher reimbursement for generators has not emerged as a solution for any of these root causes.”
While a quarter of coal plants have been out of action in recent weeks – a major factor in the supply squeeze – a raft of coal units have resumed operations to ease a forecast generation gap. The market rule-maker – the Australian Energy Market Commission – said in a draft report this month that the price cap of $300 may be appropriate from 2025 to 2028, suggesting the spike in fuel costs may be temporary.
“The panel is aware that unprecedented increases in fuel costs are driving stakeholder concern on whether the existing administered price cap remains sufficient to cover generator variable costs during an administered price period,” the AEMC’s reliability panel said in a report published before the cap was introduced this month. “At this stage, the panel considers these fuel cost increases are attributable to a set of geopolitical circumstances that do not reflect a structural change likely to remain applicable between FY2026 and FY2028.”
Industry participants say the price cap issue might have to be revisited. “It’s possible the current issues with gas supply – and therefore prices – are not structural. This suggests the massive gas price spikes we are currently enduring may recede in time, and a cap at $300 may return to being well in excess of the short-run marginal cost of most players. Certainly this appears to be the Reliability Panel’s position in its current assessment of the level of the cap,” said Christiaan Zuur, director of energy transformation at the Clean Energy Council. “I’d question whether this is necessarily the case, if for no other reason than the level of the cap hasn’t been increased for many, many years.
“Even if the current price pressures subside, it appears likely that a cap of $300 is likely to bite an increasing number of participants.”
GlobalRoam’s Mr McArdle said another factor was fuel availability: prices rose if fuel or water were scarce.
Sun Cable – developer of Australia’s biggest renewable project – said regulators and AEMO had responded well during the crisis but tweaks could be appropriate. “Look, it was a very unusual set of circumstances and ultimately, the lights stayed on. So that’s far and away the highest priority,” CEO David Griffin said. “Could it have been tweaked in a way that was … slightly more efficient? Probably. But it was an emergency situation and they dealt with it.”
