Electric flux: contentious issues in the National Electricity Market

An overview of current contentious issues in the National Electricity Market: Basslink outage and energy rationing in Tasmania, wholesale price spikes in South Australia, and the blocked acquisition of Ausgrid.

There is no shortage of contentious issues brewing in the National Electricity Market at the moment, although relatively little of it is playing out in public litigation.

In Tasmania, a fault occurred in the Basslink interconnector shortly before Christmas last year.  The undersea cable repair took close to 6 months, and coincided with a prolonged dry spell in Tasmania, which placed the State’s hydroelectric reserves in jeopardy, at least until rains arrived in May this year.  Diesel generation facilities were hastily sourced to provide backup against the complete loss of hydro power, and it was reported that the State government negotiated demand reductions with large industrial users, resulting in significant economic losses.  One would expect that questions of liability will have been canvassed at least as between Basslink and the cable manufacturer and between Basslink and Hydro Tasmania, if not more widely.  In the meantime, the Tasmanian Parliament has commenced an inquiry into the management of the State’s hydroelectric resources.

Interconnector troubles have also fed into the recent spell of high wholesale electricity prices experienced in South Australia during July.  The average spot price in South Australia in July 2016 was $250, as against a long-term average of around $50.  Planned upgrades to the Heywood interconnector, coupled with high gas prices and recent closures of coal and gas-fired generators have coincided with cold and still conditions, to squeeze both demand and supply in South Australia, resulting in a number of very high price spikes in the energy spot market.  The AER’s explanatory pamphlet usefully seeks to disentangle this confluence of market impacts.  Some market commentators have accused gas suppliers and electricity generators of opportunistic withholding of supply, although there is no indication of any enforcement action being taken at present.

Relatedly, the periodic interconnector outages have also led to a number of high price episodes in the market for frequency control ancillary services in South Australia, the costs of which are settled across generators and large customers on a “causer pays” basis.  Recently, a dispute has arisen between several groups of market participants as to how those costs should be settled among wholesale market participants: should they be borne by SA participants only, or across the whole of the mainland NEM?  The case has been heard by a wholesale market dispute resolution panel, whose decision is pending.

In New South Wales, the most recent source of contention has been the Commonwealth Treasurer’s decision, on FIRB and national security advice, to block the acquisition bids by State Grid and (more surprisingly) by the Hong Kong-based Cheung Kong Infrastructure.  That refusal may potentially carry a sizeable fiscal impact for the NSW government, if the government is not able to replicate the original offer prices through the resumed sale process.  That further sale process will now run alongside the Federal Court’s judicial review of the Competition Tribunal’s decision regarding the regulated revenues of Ausgrid and other NSW/ACT network businesses.  The outcome of that proceeding, and its impact on Ausgrid’s near-term revenues, will likely remain unclear until well into 2017, with the prospect that both the Competition Tribunal and the AER may have to reconsider their earlier decisions.

In the midst of these controversies, the COAG Energy Council met on 19 August and has committed to workstreams including fast-tracking a new NSW-SA interconnector, reviewing the market and consumer frameworks for emerging technologies in the electricity market, and reform of the East Coast gas market.  And, in an apparent reaction to the protracted NSW/ACT network pricing proceedings, the Energy Council has quietly announced a further expedited review of the limited merits review regime in the Competition Tribunal, only 3 years (and 2 Tribunal decisions) after the last overhaul of the Tribunal’s processes in 2013.

To channel the Prime Minister, there has surely never been a more exciting time … and the agility of the governance and regulatory organs of the NEM will be sternly tested over the coming years.

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