Electricity prices spiral due to water shortages

Some retailers are also believed to have short sold electricity in the
expectation that the autumn would bring the traditional dip in the market.
Traditionally, electricity turnover on the Sydney Futures Exchange is only
about 20 per cent of total physical trade in the national electricity market,
which covers the eastern seaboard, including Tasmania. It has leapt to more
than double the level of underlying supply as market participants scramble
for cover.

Large industrial users and state regulators both believe there may have
been some "gaming" of the market by generators seeking to exploit fears
about future supply.

The Electricity Users Association, which represents large industrial users,
has written to commonwealth and state governments seeking an
investigation of the National Electricity Market, claiming that the spike in
prices cannot be justified by drought and unusually high levels of
maintenance alone.

"We are aware of some evidence that generators have also changed their
bidding behaviour to take advantage of the situation," the association’s
executive director, Roman Domanski, said yesterday.

State regulators also suspect that some of the larger integrated firms, which
include both generating and retailing, may be "managing" prices higher,
putting pressure on regulators to authorise higher retail prices.

The SFE’s Collins says he believes the move in the market is too big to be
the result of any form of manipulation. However, the market is still rising and
there is no sense yet that a new equilibrium has been reached.

The increase is putting the national electricity market under the greatest
pressure in its nine year history, and casting a shadow over the economy in
the year ahead.

The companies in the toughest position are the electricity retailers,
particularly those that are not vertically integrated with a generator.

Chief executive of electricity retailer Australian Power and Gas, Jim Myatt,
says that while he is buying electricity from the wholesale market, he is
selling to a retail market that is regulated by state government authorities.

"State governments are capping our market at one end while the wholesale
market is reacting to factors outside the control of government." The state
regulators set the prices that retailers can charge households and small
business customers.

Many households and small businesses have chosen to buy their power at
non-regulated prices, which have until recently been cheaper.

However, they can always switch back to the regulated suppliers, so the
regulators set the ceiling for the retail market.

The NSW regulator last week issued a draft recommendation of price
increases of about 5 per cent in real terms over each of the next three years
but is revisiting its numbers in the wake of the soaring wholesale market.

The Queensland regulator has recommended a 10 per cent price increase.
The Productivity Commission has called for regulated price caps to be
scrapped. It argues it is forcing companies to become vertically integrated,
defeating the purpose of deregulating the electricity market.

For business customers, however, new contracts are being negotiated with
increases of anywhere from 50 to 100 per cent.

Electricity represents 15 to 20 per cent of costs for industries such as paper,
cement and steel. The increased cost can be expected to flow through into
economy-wide costs in the same way as last year’s oil price increase.

The drought is the most obvious cause of the price spike. Snowy Hydro and
Tasmania have essentially ceased delivering peak power. When Tasmania
was joined to the national grid, it was expected to be a major supplier to
southeast Australia but is instead importing power.

The peak power load is now being delivered by gas turbines.

More serious is the shortage of water for the cooling towers of the major
coal-fired power stations which deliver base load. Tarong, in Queensland,
has had to cut back its base load by 850 megawatts, which is about 5 per
cent of base load supply to the national market.

The major Victorian base load stations in the Latrobe Valley have been
buying water on commercial markets because their entitlement is not
enough to keep the cooling towers supplied and there are concerns about
their security of supply.

The executive director of the National Generators Forum, John Boshier,
says major maintenance is usually planned for autumn and spring, which are
not considered peak seasons. He said this had taken a further 4500
megawatts out of supply.

He said high prices would act as an incentive for generators to install water
recycling plants.

"I’d make a plea for the market outcomes to be trusted, so the high prices
act as incentives for alternative forms of cooling and energy."

He said the effort by users to get a government investigation of the market
reflected the fact that many had failed to hedge their long-term position
adequately.

Jeff Washusen, electricity specialist with the economics consultancy
Marsden Jacobs, says there is a longer-term problem with the working of the
electricity market.

"Since 1998, when the national electricity market first started, there has
been virtually no market-initiated investment in base load capacity," he said.

Dr Washusen said new capacity in Queensland had been initiated by the
Government. The only private sector investment had been small gas
turbines supplying peak load.

He said the price of electricity on the national market had been enough to
provide profitable operations for companies with installed generators, but did
not deliver the incentive to build new capacity. As a result, the market had
become tight, and high prices could be here to stay.

Source: The Australian  

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