South Australia’s big gamble on grid-scale battery storage may pay for itself in just a year if it continues to prevent massive price spikes

On Sunday 14 January something very unusual happened.

The Australian Energy Market Operator called – as it often does – for generators in South Australia to provide a modest amount of network services known as FCAS, or frequency control and ancillary services.

This time, though, the market price did not go into orbit and the credit must go to the newly installed Tesla big battery and the neighbouring Hornsdale windfarm.

The call for 35MW of FCAS – usually made when there is planned maintenance or a system fault on the interconnector between Victoria and South Australia – has become a running joke in the electricity market, and a costly one for consumers.

The big gas generators – even though they have 10 times more capacity than is required – have systematically rorted the situation, sometimes charging up to $7m a day for a service that normally comes at one-tenth of the price.

(You can read reports on how they do it here, here and here, and for a more detailed explanation at the bottom of this story.)

The difference in January was that there is a new player in the market: Tesla. The company’s big battery, officially known as the Hornsdale Power Reserve, bid into the market to ensure that prices stayed reasonable, as predicted last year.

Rather than jumping up to prices of around $11,500 and $14,000/MW, the bidding of the Tesla big battery – and, in a major new development, the adjoining Hornsdale windfarm – helped (after an initial spike) to keep them at around $270/MW.

This saved several million dollars in FCAS charges, which are paid by other generators and big energy users, in a single day.

And that’s not the only impact. According to state government’s advisor, Frontier Economics, the average price of FCAS fell by around 75% in December from the same month the previous year. Market players are delighted, and consumers should be too, because they will ultimately benefit.

Ed McManus, the CEO of Meridian Australia and Powershop Australia, which operates the Mt Millar windfarm in South Australia, says the Tesla big battery is already having a “phenomenal” impact.

“If you look at FCAS … the costs traditionally in South Australia have been high …. and our costs in the last couple of years have gone from low five-figures annually to low six-figures annually. It’s a hell of a jump,” McManus said in this week’s RenewEconomy’s Energy Insiders podcast.

“That plays into the thinking of new players looking to come in to South Australia to challenge the incumbents. FCAS charges are on their minds.

“It’s a little early to tell, but it looks like from preliminary data that the Tesla big battery is having an impact on FCAS costs, bringing them down … that is a very, very significant development for generation investment and generation competition in South Australia,” McManus said.

There is no doubt that the actions of the Tesla big battery in the FCAS market will please the state government, which signed a contract with Tesla to address just this issue. And it may be able to repeat the dose with the newly announced 250MW “virtual power plant”, also to be built by Tesla.

If it can keep a lid on FCAS prices like it did in January, then it will likely pay back the cost of the battery in a single year from this service alone, let alone the value of its trading in the wholesale market, and the value of its emergency backup capabilities.

It’s just another string in the bow of the Tesla big battery, following its devastatingly fast response to trips of major coal-fired generators (it was in the market again on Saturday night after Vales Point in New South Wales tripped), its ability to go to capacity from a standing start in milliseconds, and its smoothing of wind output and trading in the wholesale market.

These graphs below explain what has been happening in the FCAS market in the past year, and what happened on 14 January.

Let’s take 14 September as exhibit A. The Australian energy market operator, Aemo, called for 35MW of FCAS for a well-advertised maintenance schedule, but the four big operators – AGL, Origin and Engie – could only find 30MW of “low-priced” capacity, despite having more than 400MW available. So the prices went into orbit.

Graph shows price spikes and responses
Photograph: None

According to the Australian Energy Regulator report, the bidding patterns cost around $7m that day (see the chart below for comparison with a normal day’s work). Sometimes the shortfall has been just 1MW or 2MW, but it sends the prices up nevertheless. The generators profit from the scarcity they create.

graph show price spikes and responses
Photograph: None

This practice has been systematic for more than a year, and there has been at least 10 such events in the past 12 months.

In January, however, after an initial spike, the Tesla big battery bid in at around $270/MWh and that’s where the market stayed. It probably saved around $3m or more.

graph show price spikes and responses
Photograph: None

What’s particularly interesting about this is that it was not just the battery bidding in, it was also the neighbouring Hornsdale windfarm – also owned and operated by the renewable energy company, Neoen – that bid 10MW of FCAS into the market as it continued its trials sponsored by Australian renewable energy agency (Arena) and Aemo. This is a huge development.

There are separate markets for lower regulation, but for ease of purpose we have chosen to focus on the raise regulation market only. But the results are the same for both.

Article originally published in The Guardian 6th Feb 2018

Gas generators profit from scarcity in S.A. again, and again

A reader sent in an email late last week about the huge price spikes in Australia’s wholesale electricity market in the midst of the heatwave that swept south-east Australia.

In what other industry, he asked, can you see such sudden gyrations where prices jump 50-fold or more in a matter of minutes? And how is this allowed?

They are perfectly valid questions.

The huge jump in prices – often from ar0und $50/MWh to peaks of more than $14,000/MWh – have been happening for years, and well before the introduction of large and small scale renewables that often cop the blame.

(This graph above highlights the number of price spikes above $5,000/MWh recorded by the AER in a previous report).

The wholesale electricity market is dominated by the major generators (coal, gas and hydro) who have the ability to add or withdraw capacity at their whim, and who are able to manipulate prices in times of “scarcity” – real or manufactured – because they can.

And because no one will do anything about it.

The Australian Energy Regulator said late last week that it would “report on” the price spikes in Victoria and South Australia that occurred last Thursday. But don’t expect a report anytime soon, and don’t expect it to cause any problems for the market players involved.

It will likely find that the price spikes were a “market” response to a sudden loss of capacity – in this case the tripping of one of two Loy Yang B units on Thursday afternoon that removed 530MW without warning. It will take the AER two months to tell us that.

Even when the price manipulation appears contrived and deliberate, nothing ever happens. Take, for instance, reports by the AER into two price spikes in a related energy market last year – the market for Frequency control ancillary services, or FCAS.

The FCAS market – which provides grid services to make sure, among other things, that the frequency of the network is under control – is not a market that is ever in short supply.

In South Australia, where most of the price spikes occur, there is more than 400MW of capacity, and the Australian Energy Market Operator only ever needs less than a tenth of that – 35MW – such as when the inter-connector is down for repairs or sudden failures.

But every time AEMO calls for this capacity to be put on standby, the price shoots up. Why? Because the main providers – AGL, Origin Energy, and Engie – simply refuse to sell their capacity at normal market prices.

Often times, as we have reported on numerous occasions, and most recently here – they make only a total of 34MW available at normal prices, but charge $15,000/MW for that last MW. That sets the price for all the capacity needed.


Sometimes, the actions of the generators are quite deliberate. Take October 24 last year, when an unexpected equipment failure on the interconnector linking Victoria and South Australia forced AEMO to invoke its call of 35MW of FCAS support, in case it was needed.The AER report into the incident noted that at the time there was more than enough “low-priced” capacity in the “raise regulation” market. But within six minutes of the AEMO announcement, that all changed as AGL bumped up its prices around 100-fold.

“(Data) shows that there was enough low priced capacity (blue shaded area) to meet the requirement for raise regulation service (red line) when it was introduced at 6.25 pm,” the report says.

“At 6.32 pm, effective from 6.40 pm, AGL rebid 16 MW of raise regulation services at its Torrens Island power station from prices less than $12/MW to $11 500/MW and above.”

Prices jumped to 11,500/MW and stayed there until AEMO removed the requirement two hours later.

What will the AER, or the Australian Competition and Consumer Commission do about this?

Absolutely nothing. They see it as the “market at work.”

Proposed reforms to those markets, such as creating a more efficient FCAS market, changing the settlement periods on energy markets to encourage smarter and quicker technologies like battery storage, have been fiercely resisted by the incumbents, and delayed by the market rule-maker, the Australian Energy Markets Commissions.

Most of the cost of wholesale electricity prices are sourced from just a few hours of trading a year – when the market participants are able to manipulate prices, and get away with it because electricity is an “essential service”, and when generators choose not to switch on at critical moments, as Pelican Point did last February, then the lights might go out somewhere.

This hasn’t got anything to do with technology or emissions, greens, browns or blacks. It’s all about market control, greed, and piss-weak regulation.