Why Is Australia’s Energy Market So Broken and What’s Being Done About It?

nergy crisis australia

After another dramatic day in the Australian energy market (who thought that would be a phrase we’d be writing?), Australia’s Energy Market Operator, AEMO, has made the unprecedented decision to suspend the ‘spot market’ for wholesale energy trading across the country.

To really grasp the significance of this, you need to know a little bit about what exactly a spot market is and why we use it. We’ll go into detail below, but suffice to say that it’s a relatively haphazard system where demand is met by supply on a moment-by-moment basis in the power grid.

AEMO Chief Executive Daniel Westerman has said that the current system was “impossible to operate” while still “ensuring a reliable, secure supply of electricity to Australian homes and businesses.”

This is the first time ever that the spot market has been suspended nationally. Westerman explained that the drastic move had to be made to avoid blackouts as the current system is not able to deal with the range of issues it’s facing. Those issues include very high demand, steep prices for energy creation, and a number of planned and unplanned halts to operations at power plants.

Australia, by most measures, is a modern, well-functioning society. So why, in 2022, are we on the verge of a national energy market collapse and blackouts across the majority of states and territories? It’s all to do with the way the system is set up.

What is The Spot Market?

A spot market is one way of delivering goods and services. It’s basically the supply of something at the moment of demand. Bartenders, for example, work in a spot market. You walk into a bar, order a drink, and they give it to you on the spot. Simple supply and demand.

It’s the opposite of another way of running a market which is known as a futures market. Anticipating future demand, some services have contracts to supply goods and services ahead of time. Supermarkets operate like this (sort of) in that they secure a supply of certain products ahead of time, knowing that people will want to buy them in the future.

It makes sense to run some operations as spot markets and some as futures markets. For the most part, Australia has run its energy system as a spot market, as most countries do. Because electricity is difficult to store, power generators turn on and off at particular times, based on the demands of the market. They need to send power to where it’s needed, as it’s needed, otherwise they risk not having anywhere to sell to when it’s running as those demands are being met elsewhere.

This is a very simplistic overview but that’s pretty much what’s going on now. Because Australia has competing energy suppliers, ranging from coal-fired power stations, to gas, oil, and renewables, all of these turn on and off at different times, hoping to fulfil demand when it’s highest and therefore get the best price for their power.

This works in theory, but it’s a game of profit maximisation. There have even been claims that some energy retailers have been deliberately withholding power in order to amp up demand and cash in on desperate suppliers.

The suspension of the spot market means that AEMO is now demanding power generators run at certain times, having power ready to go when it’s needed.

Why is Australia’s Energy System So Broken?

New PM Anthony Albanese has laid the blame for the current failures at the feet of the previous administration, claiming they didn’t do enough to smooth out the kinks in what is a highly convoluted system.

Poor Federal Energy Minister, Chris Bowen, has only been in the job a couple of weeks and found the energy system collapsing around him. Because the previous government refused to update the national energy market to deal with the income of renewable energy sources, he claims that current pressures are tanking the whole thing.

Much of the reason as to why the system is so cooked is due to the fact that it has so many moving parts, both big and small. State governments have their own regulations and contracts with individual suppliers and the federal government has nationally owned ower generators. The whole system works to extract as much money as possible from the consumer and therefore intentionally runs with very little slack to create higher demand.

Once you start losing power generators, as is the case with a number of plants that are currently offline, coupled with high demand and increased running costs, it starts to break down, as is happening now.

What Can Be Done to Fix It?

Coalition Leader Peter Dutton has blamed Labor’s eagerness to transition to renewables for causing the energy crisis — an entirely baseless claim.

Labor sees gas-fired power stations as a necessary part of energy transition — they’re not about to go out and tear up the current system. The real issue is that we don’t have slack in the system and that it’s always been run as a spot market.

Renewables, owing to the nature of power generation, require batteries to make them really effective. Because the previous government refused to invest in this sector, we don’t have a store of power that we could use when things get difficult. South Australia, for example, has a large reserve of renewable energy stored in its famous Big Battery, built after the state suffered a series of blackouts. As such, they have very little risk of power outages.

While Labor have plans to overhaul the system, it’s going to take several years and likely successive governments to do it properly.

In the short term, given we’re all paying for these failures, Crikey has suggested Labor get behind a power company windfall tax to claw back some of the revenue that these companies are making at our expense. The UK has just passed a similar tax, during their own cost of living and energy crisis, and our new, more left-leaning government shouldn’t, in theory, be opposed to such measures.

Doing so would ease cost of living pressures, if the money is well spent, but the current crisis may have to go on for much longer if it is going to push Labor in that direction.

Did Gas Generators Game the System? 

In a dramatic turn of events, Albanese has laid some of the blame for this crisis at the feet of our gas generators. This is because he believes that some retailers did in fact exit the market after the country’s sky-high power prices had been capped. According to the ABC, such a move would result in these gas generators getting paid more cash than usual, as the market operator would’ve asked them to send their power “into the network” so that Aussies wouldn’t suffer.

“There was a bit of gaming going on of the system,” declared Albanese. “Which is why AEMO used its tools at its disposal to intervene, so we do have these short-term issues.” The PM also stated, “What we needed to do was to have a short-term measure in place, but also to make sure that we get that [renewables] investment, so that in the future we don’t have these problems.”

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