AER’s review of June energy crisis stops short of labelling withdrawal of capacity as illegal

The Australian Energy Regulator wants measures to help move the system smoothly to net-zero emissions, including a ‘contract monitoring function’.

A new battleground has opened up for the electricity industry after the national regulator called for new powers to scrutinise the behaviour of power generators, including a focus on coal suppliers.

The call follows a review of the national energy crisis last winter.

Some high-cost producers refused to supply the national electricity market during the 2022 winter over fears of running at a loss. This eventually forced the entire system to be suspended amid accusations from Prime Minister Anthony Albanese that generators were essentially “gaming the system”.

The Australian Energy Regulator reviewed the suspension of the market in June and concluded that generators had behaved unhelpfully by withdrawing capacity but stopped short of accusing them of any illegal behaviour.

Australian Energy Regulator chair Clare Savage.

“The investigation revealed behaviour that resulted in poor market outcomes. Some generators, in withdrawing capacity from the market, engaged in conduct that significantly contributed to the circumstances causing the Australian Energy Market Operator to issue a direction,” the AER said as part of a two-year review of the wholesale electricity market.

“Several generators appear to have had little to no regard about the effect of their actions on the broader system.”

AER chair Clare Savage said that while the observed conduct was not necessarily illegal, it might indicate that competition in the market was ineffective at times.

“The exercise of market power, and subsequent upward pressure on price, is not on its own a breach of the national electricity rules but it could point to issues in both market design and the effectiveness of competition,” Ms Savage said.

The regulator has proposed a series of measures to help move the system smoothly to net-zero emissions, including a “contract monitoring function for the AER” to ensure it can accurately scrutinise the behaviour of participants and identify roadblocks to competition and efficiency.

Coal emerged as a focus due to a series of coal-fired power station closure time-frames accelerating this year and some 17 gigawatts of supply expected to exit the market by 2035 – about a third of the current capacity of the market.

Australian Energy Council chief executive Sarah McNamara.

“Providing a clear and co-ordinated pathway to reduce the significant uncertainty that currently exists in the national electricity market, create confidence for investors and facilitate a smoother transition; An action which may support this would be to explore the increased regulation of coal-fired generators in some form, as its viability and exit pathway is a significant source of uncertainty,” the AER said.

The move follows a controversial push by the Albanese government to introduce sweeping energy intervention powers in an effort to lower prices and bring more supplies to the market.

Regulators imposed an administered price cap of $300 per megawatt hour in June 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 stood to make a loss on high-cost generation and were worried about running out of fuel. The cap has now been doubled to $600MWh, designed to avoid a repeat of last winter’s market suspension and ease ongoing pressures on supply.

The Australian Energy Council, representing generators, said the AER report reflected the “extraordinary circumstances” electricity generators and the market operator were attempting to navigate during the winter supply crisis.

“We were dealing with a set of extreme conditions that had not been encountered before and which led to the first ever suspension of the market,” AEC chief executive Sarah McNamara said.

“What’s clear is that generators were trying to deal in real time with a black swan event. They had reasonable cause to withdraw capacity at times given those unprecedented circumstances.”