Regulations create super profits in electricity supply – will Governments move to seize these?

Environment and Energy Minister, Josh Frydenberg has assailed the Queensland government for presiding over (if not conspiring to produce) an outcome in the electricity market which has enriched the state government coffers by $1.5 billion (actually over four years).

Following a reorganisation, the previous three generator portfolios, directly owned by the Queensland government were collapsed into two.  It is doubtful that the two businesses were actually formally coordinating their bidding (actions that are illegal) but the understanding of contracts, capacities and likely outages makes it easier for suppliers to take advantage of demand conditions and create contrived shortages when there are only two main players.

Although the Queensland government’s beneficial ownership is less than 50 per cent of the state’s generation capacity, it owns or controls a much larger share of the actual output (wind and gas where there is no government ownership only operates at about one third of its nominal capacity).  The Queensland Government owns 63 per cent of the all-important coal generation capacity and has a controlling interest in another 10 per cent.

Competitive factors that Frydenberg highlights doubtless played a role in the profit bonanza Queensland state generators have reaped.  But much of the “windfall” to the Queensland Government would have occurred as a result of higher prices in the National Electricity Market stemming from the withdrawal of coal generation capacity, especially Hazelwood and South Australia’s Northern Power Station.

Those events have caused the spot price for electricity to have doubled, alongside the gross returns from the National wholesale market which were $8.2 billion in 2014/15.  Although most electricity is sold by contract and not on the spot market, the contracts (which normally exceed the spot price) follow the spot prices after a lag.

This revenue windfall goes straight to the bottom line as costs, except those of gas generators which account for around 7 per cent of supply, have not changed.  So the electricity generators are presently earning almost $8 billion a year in unanticipated profits.  Coal generators account for three quarters of this.

Everybody has seen those annoying AGL ads for how things are changing and the business is to replace its coal fired power stations between 2022 and 2050 by clean, modern wind and solar facilities.  At present over 80 per cent of AGL electricity generation is coal and most of the rest is gas.  Electricity price developments have made that asset base extremely profitable.

In its latest investor presentation, AGL reports “underlying profit” as being $720-800 million.  However, its gross electricity margin was $772 million in the first half of 2017, up from $714 million in the same period last year.  AGL has around 24 per cent of the National generation market, meaning it is earning ‘super profits’ of some $1.5 billion a year from the energy crisis that government policy has created.  One industry insider pointed out that the company has engaged highly priced advocacy specialists paid for in coal dollars to burnish its anti-coal credentials.

AGL with the largest coal generation portfolio has benefitted most but other generators will also have profited.

This has possible implications beyond the political capital that Frydenberg is seeking to make by drawing attention to the Queensland situation.

As Michael Sexton points out in today’s Australian, in contrast to Menzies’ day nobody now asks, ‘where is the money coming from?’ – they want the spending and they want someone other than themselves to pay.  Governments are therefore voracious hunters of soft revenue raising targets.  The electricity market has been totally undermined by political intervention.   How long before the Commonwealth recognises that super profits are being earned as a side effect of harmful government actions and, like its Queensland counterpart, moves to grab those profits for itself?

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55 Responses to Regulations create super profits in electricity supply – will Governments move to seize these?

  1. cohenite

    Alan I read different accounts of the capacity factor of wind and solar. Tom Quirk and Andrew Miskelly find it to be much less than 33%:

    Miskelly A & Quirk T 2010, ” Wind Farming in South East Australia”, Energy & Environment Vol 21, Vol 20 Number 8 – Vol 21 Number 1 / December 2009 – January 2010. (sorry the direct link to this paper is gone)

    The real defect of wind and solar however is their Reliability Point, which is defined as the probability of 90% of the installed capacity or maximum output occurring at any one time. Quirk and Miskelly find this to be less than 10%. This essentially means wind and solar are useless.

  2. Alan Moran

    Cohenite. Wind is probably less that 30 per cent (solar considerably less) and the unreliability is such that AEMO does not even give it 10 per cent towards reliability.

  3. cohenite

    Also of interest is this paper by Miskelly where on page 5 he finds that wind farms produce NO power for 38.9% of the time:

    https://www.windturbinesyndrome.com/wp-content/uploads/2013/08/Miskelly-dispersal.pdf

  4. Dr Fred Lenin

    If turdbull steals these windfalls from Queensland it will bea bitchfigh between two socialist gangs , bit like a mafia squabble ,turdie vs wossername ,hope its a fight to the death ,removing a lefty from stolen money is a real chore .

  5. dopey

    There is only one source of reliable wind.

  6. Rafe

    Can this be explained to the median energy consumer?

  7. Alan Moran

    Rafe
    The median energy consumer is paying more than double for the wholesale component of electricity, that is 20-30 per cent more for electricity at retail (and more for all the goods and services bought as these incorporate electricity) . This post assesses who gains.

  8. BoyfromTottenham

    Slightly OT, but can readers please take a look at the eligibility formula for LRETs and tell me if they also think that the formula is wrong (see link below)? The ‘worked example’ shows that their hypothetical renewable generator is eligible for 90 certificates for sending 50 MWh to the grid = 1.8 certificates per MWh, rather than the ‘one certificate per MWh’ stated near the top of the page. If this really an error, the renewables industry is being overpaid by around $1 BILLION per year!

    BTW I think the way that the parameter called the Marginal Loss Factor (MLF) is used in the formula is the problem.

    See here: http://www.cleanenergyregulator.gov.au/RET/Scheme-participants-and-industry/Power-stations/Large-scale-generation-certificates/Large-scale-generation-certificate-eligibility-formula

  9. BoyfromTottenham

    Cohenite: Also check here (https://www.hepburnwind.com.au/wp-content/uploads/2014/06/FY16_Hepburn-Wind-Annual-Report-.pdf) where a small windfarm generates twice as much revenue from the ‘hidden subsidy’ of LRETs as from actually generating electricity, helping it to a cozy 20% net profit at our expense.
    Take away this subsidy, and all these bird munchers disappear. Whoopee.

  10. Bruce of Newcastle

    Well since subsidies are going to the energy companies for renewable energy, it would make sense to reduce their super profits by withdrawing the subsidies. After all if they are earning super profits then they obviously don’t need subsidies do they?

  11. cohenite

    BoyfromTottenham

    #2447288, posted on July 21, 2017 at 4:58 pm

    Thanks; it is criminal.

  12. incoherent rambler

    State government scamming billions in the name of Globule Warmening.
    Who would have guessed it?

  13. Empire GTHO Phase III

    How long before the Commonwealth recognises that super profits are being earned as a side effect of harmful government actions and, like its Queensland counterpart, moves to grab those profits for itself?

    Josh clearly isn’t that sharp. I reckon a couple of days.

  14. BoyfromTottenham

    Bruce of Newcastle: Spot on, Bruce!

  15. RobK

    The Queensland government also owns at least one wind farm in WA (near Cervantes, coastal mid west). WAs pricing structure is different to the east.
    Separately, I note Finkel did mention in his report that the bidding system based on 5min blocks but paid based on the price setter half hourly, is prone to rorting and should be modified to be paid on the 5 min blocks. That will help but not eliminate the problem.
    Queensland’s coal burners are killing the pig, so to speak.

  16. cohenite

    From Dr Michael Crawford’s response to finkel:

    Last year the average AEMO NSW electricity price was $51.60 per MWh. (It was $28.27 in
    2000 and $81.40 so far for 2017.)1 Over the last six months, the spot price for Large-Scale
    Generation Certificates (LGC), mandated under the RET, has varied around $85 per MWh2.
    So, in that period (using rounded numbers for illustration), a coal-fired generator selling into
    the grid at spot prices might receive $80 per MWh supplied. However, an IED would receive
    the same spot price of $80 per MWh AND a further $85 per MWh from selling the RETmandated
    LGC it is authorised to create for each MWh supplied into the grid. So, for selling
    the same amount of electricity, the coal-fired generator receives $80, while the IED receives
    $165.
    Of course, as you know, the system is even more weighted to the benefit of the IED. The spot
    price varies greatly even within a day but in a way that guarantees the IED provider will
    always receive more in total per MWh than the fossil-fuel generator because of that LGC
    subsidy which electricity consumers are all forced to pay.

    In addition to this the back-up coal and gas must defer to wind and solar, when they are producing so in effect there is a massive inbuilt duplication. The fossils only get paid when the renewables aren’t producing but must keep operating continuously for the periods when the renewables aren’t producing.

  17. RobK

    Those companies owning both fossil fuel and renewballs are cleaning up.

  18. Elizer Right

    BoyfromTottenham
    #2447288, posted on July 21, 2017 at 4:58 pm

    Interesting tax note: Tax assets are not recognised until it is probable that future profits will be available against which the benefits of the deferred tax asset can be utilised.

  19. cohenite

    Elizer Right

    #2447375, posted on July 21, 2017 at 6:20 pm

    BoyfromTottenham
    #2447288, posted on July 21, 2017 at 4:58 pm

    Interesting tax note: Tax assets are not recognised until it is probable that future profits will be available against which the benefits of the deferred tax asset can be utilised.

    So the bastards never pay tax.

  20. IDefender of the faith

    It’s not a market. For two reasons. One is that the bulk of Australian power is consumed in a virtually identical profile demand in a common time zone. There is no business incentive to create supply for anything other than the peaks. The primary option for peak supply is gas and the market for gas is also stuffed up to the point where imputed export prices are lower than domestic prices.
    Given the total train crash that is our energy policy we have to anticipate further injury and certainly loss of industry.

  21. Roger

    Wind is probably less that 30 per cent (solar considerably less) and the unreliability is such that AEMO does not even give it 10 per cent towards reliability.

    And yet the CEO of AEMO is gung ho for renewables. Go figure.

    Ms Zibelman was quoted in the press last week saying Musk’s 100 day guarantee on the big battery was crucial to AEMO’s plans for summer. She’s apparently unaware that all reports indicate the contract with SA allows for a mid to late December installation without penalty. Besides which, the battery’s ability to positively impact the eastern grid supply is minimal.

  22. RobK

    Roger,
    Musks 100 days starts after regulatory clearances are given….hence the convenient delay. The anxiety of summer start is to avoid the predicted short falls. They will need to find another rabbit to pull out of the hat, hence the scramble to find diesel and other back up. It’s all a bugger-up.
    I don’t think the SA government will own the battery, they only said they could call on it as required. Does anyone have any details of the battery’s detailed business model? I suspect Musk will clean up.

  23. Squirrel

    The use of utilities as a form of indirect taxation revenue for state governments is a long-established practice, so no one could be genuinely surprised by this.

    While in no way wishing to excuse the profligacy of state governments, federal governments (of both persuasions) which are constantly dreaming up grand new spending schemes – typically implemented on a “cost-sharing” (i.e. federal and state taxing and borrowing) basis – in areas which are properly the responsibility of state governments, are only adding to the problem.

  24. RobK

    Dr Crawford’s letter is a good one.

  25. Tel

    The use of utilities as a form of indirect taxation revenue for state governments is a long-established practice, so no one could be genuinely surprised by this.

    No one is genuinely surprised by state government pocket stuffing, but pretending to be outraged by the mundane, while oversimplifying everything and straw-manning your opponent is standard procedure these days. It has worked well for the “Progressives” so everyone’s doing it.

    Yes, I do understand that this is a completely moronic approach, guaranteed to achieve nothing, but no one could be genuinely surprised by this.

  26. Robber Baron

    The ‘money-go-round.’ That’s all I see here. Taxes, subsidies, regulations, rebates, direct payments, indirect payments, State receipts, Commonwealth payments…it’s all one big money-go-round requiring lots of public servants to make it all work. And lots of crumbs fall off at each stage only available to be swept up by insiders. Lots and lots of crumbs.

    Privatise it all. No subsidies. No tax breaks. Nothing. Let the consumer decide who to buy electricity from and let business risk its capital supplying electricity.

  27. OneWorldGovernment

    Obviously a lot more hard work needs to be done to shut down all the coal mines.

  28. Rayvic

    AGL are sharks — certainly not fair people to do business with.

  29. Rayvic

    Given that Queensland gets more than its fair allocation of GST from the Feds, as well as holding the other East Coast states to ransom for electricity sold to them, it would be fair for the Feds to pare that GST share back to neutral or less.

  30. RobK

    Bf Tottenham,
    The worked example is ok. The formula allows for a situation say:
    A factory produces 100MWh measured, where 50MWh are used in industry is counted, 5MWh used to generate the energy (say cooling of inverters etc) is not counted, 50MWh exported to the grid is counted but 5MWh is deducted for transmission losses. So a total of 90MWh is credited, 10MWh are not, out of 100MWh produced.

  31. bushwalker

    RobK, thanks for that information reducing my ignorance; I’d thought LGC’s were only generated by supplying energy to the grid. This is a powerful incentive to industry to install renewables.

  32. BoyfromTottenham

    RobK: why is the 50 MW ‘used in the industry’ counted towards certificates (a subsidy exchangeable for cash) ? It isn’t dispatched (sold). Is this a rort? Thanks.

  33. Dianeh

    Robk

    Would your example apply to a business with multiple sites generating power for eg a water corporation with solar panels on all plant installations?

    Victoria has mandated that all govt depts must have zero emissions by a certain date (can’t remember the date). I wonder now if Andrews is relying on more than just federal subsidies to pay for this boondoggle.

  34. RobK

    Dianeh,
    Yes, all renewables qualify for the certificates if they do the job of replacing fossil fuels I.e. CO2 emissions. They needn’t be grid connected.
    BoT,
    Yes, it is a rort. A convoluted path from the persecution of CO2.
    Bushranger,
    Yes it is an incentive for industry to install renewballs. A word of caution at least for those in WA ( I’m not familiar with the east). In WA commercial PV has NO feed in tariffs so the agains are purely for self use. Peak Commercial tariffs are high (many around 37c/kWh+) so if business uses most of it’s energy during daylight hours, as many do, a case can be made with the present settings. You get nothing for putting excess into the grid as a small scale generator (under 100kWh) but you do get your certificates calculated like domestic ones I.e at a lower rate, something like around $35/kWh calculated upfront as if you would produce them for 15 years. This is what the installers generally claim on behalf of the owners to keep purchase price down. Domestic installations get feed-in tariff on top of this from the State. (but their on peak power is cheaper than commercial).

  35. RobK

    Also, large scale solar kicks in at 100kW sized generators. These qualify for large scale certificates which are not paid up front and have to be measured (metered) and applied for annually. These generally trade at the higher price of around $80-85 dollars/MWh, it’s what the big boys trade.

  36. RobK

    It is a massive incentive and will greatly disrupt the way the grid operates. The grid will need to carry large surges of power a long way in a chaotic manner to serve a small client base of intermittent self producers; so a physically tougher more controlled grid to service less market volume. Which ever way you look, this can’t be done cheaply.

  37. RobK

    My reference above to small scale certificates should be $35/MWh not kWh..sorry.

  38. old bloke

    cohenite
    #2447339, posted on July 21, 2017 at 5:53 pm

    In addition to this the back-up coal and gas must defer to wind and solar, when they are producing so in effect there is a massive inbuilt duplication. The fossils only get paid when the renewables aren’t producing but must keep operating continuously for the periods when the renewables aren’t producing.

    Except in South Australia where the gas generators are paid to keep operating even when renewables are supplying sufficient to meet demands, so as to avoid gaps in the supply.

    It’s a ridiculous situation, fossil fuels are subsidised so that they can compete with subsidised renewables. Insanity on steroids.

  39. Dianeh

    Robk

    Thank you for your great explanation.

  40. Roger

    Musks 100 days starts after regulatory clearances are given….hence the convenient delay.

    Yes, but Zibelman evidently isn’t aware of this; she’s counting on it being up and running before the first day of summer.

    This does not inspire confidence in her ability to effectively manage the electrickery market.

    The best we can hope for is an absolute s tinker of a summer leading to widespread load shedding at peak times. That will expose the farce for all to see.

  41. RobK

    Roger,
    I guess he has effectively got 5 months (i think summer starts in December? Statement made early july). Still a pretty good effort, even if it is all modular. …I don’t take Musk to be a fool.

  42. Roger

    Still a pretty good effort, even if it is all modular. ….

    Aye, but to what end?

    At best, it’s a test case…and a very expensive one for SA.

    Musk is certainly no fool, unlike Jay Weatherill.

    Incidentally, since raison d’etre of our power malaise is reducing emissions is reducing carbon emissions I’d like to see someone calculate the carbon footprint of the battery over its lifetime and its replacement for that matter. I believe the manufacture of just one of Musk’s car batteries produces carbon emissions equivalent to driving a petrol driven sedan for eight years.

  43. Roger

    Sorry for typing fail…keyboard is doing strange things.

  44. Roger

    I believe the manufacture of just one of Musk’s car batteries produces carbon emissions equivalent to driving a petrol driven sedan for eight years.

    Result of a recent Swedish study, btw.

  45. Winter has come

    I was at a business lunch a month back sponsored by AGL. Their ad came on the big screen with the condescending beardy type saying their moving out of coal..are you with us?
    The room went silent for the 10 seconds. The disdain from the audience was evident in eye rolls, head shakes and the odd abusive name muttered.

  46. RobK

    Roger,
    I agree. The present trajectory of energy policy will end in tears.

  47. Russell

    One thing that you should be aware of was the question of collusion in bidding in Queensland was determined some time ago by the Federal Court with regard to rebidding close to the time of dispatch. The answer was that there was no collusion and the generators were not breaching the law.

  48. David Brewer

    As Henry Ergas said in an article linked here a few weeks ago:

    Once the dust settles, it will be clear that we are doing to electricity what was done to telecommunications: destroying the market and making renationalisation inevitable. The only question left is when and at what cost.

    Really, renationalisation cannot come soon enough. After dropping for 40 years to 1995, under state management, electricity prices since privatisation have rocketed back up again and now exceed the level of the 1950s. The whole point of privatisation was to reduce the cost, but an avalanche of regulation has destroyed the market and obliterated its objective in just 20 years. The Queensland government’s gaming of the profits now sets us on the road to renationalisation, but I suspect that, to answer Henry’s questions, it will be a long and very expensive process, with so many snouts now in the trough. As to prospect of a free market that might actually produce what consumers want at minimum cost – well if you have grandchildren, perhaps they might see the day…

  49. EvilElvis

    Bugger renationalisation, how about we cut regulation and get the government the fuck out of energy. Government cock ups are never fixed by more government!

  50. classical_hero

    Only the government can solve the problem, which was caused by government. The definition of insanity is trying the same thing over and over again and expecting a different result.

  51. Alan moran

    David Brewer
    We already have re-nationalisation: it is just that the governments have left assets associated with particular bond holdings. Once they realise that the coupon rate of interest they thought the different assets were obtaining is more than they regard as appropriate, they will move to seize the surplus profits their policies have inadvertently created.

  52. Alan – anybody else notice this?
    Negative electricity prices support case AEMO must be reformed
    http://www.warwickhughes.com/blog/?p=5234

  53. CameronC

    This situation has only arisen because the southern states have allowed their electricity supply capacity to drop below their demand. This means that for a significant percentage of the time the Queensland generators are in a position to set the price. Who can blame them for taking advantage of the green stupidity of southern governments.

    We have the same situation with gas supplies. Queensland develops their gas industry while southern states do not. When gas supplies in southern states start to run out there is a big grab for the export gas from Queensland. F$%k them I say. Why should Queensland be forced to bail out incompetents.

  54. Rob MW

    The Commonwealth’s and States intervention(s) into one of humanities greatest gift’s is about as shameful and corrupt as has ever been foisted on a broad-based production dominated economic society, where uncompetitive artificial and completely unnecessary cost of production increase for both domestic and international markets can only end one way.

    My answer is for every single business and household in Australia to regularly strike, don’t use any mains power for day, or even hours of a day until, or unless, the stupid fucking governments come to their fucking common senses.

    But alas !!!!!!!!!!! there will be over anxious diarrhea to contend with.

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