Statutes Amendment (National Energy Laws) (Wholesale Market Monitoring) Bill

Second Reading

Adjourned debate on second reading.

(Continued from 21 March 2024.)

The Hon. H.M. GIROLAMO (17:05): This bill, the Statutes Amendment (National Energy Laws) (Wholesale Market Monitoring) Bill, seeks to grant the Australian Energy Regulator (AER) new powers for monitoring gas and electricity contracts. This issue really came to the forefront out of the winter of 2022 when there was extensive pressure on the Australian energy system, with twin pinchers of higher prices and price volatility in the wholesale energy market. Also in winter 2022, we experienced high prices in the national gas market—prices not seen before.

Pushing for this change are a number of reports, including the Australian Competition and Consumer Commission's 'Inquiry into the National Energy Market' report, which sought to expand the AER's wholesale market monitoring functions to gas wholesale markets, as well as electricity and gas contract markets. Following those recommendations, energy ministers agreed to legislative change and, as the lead legislator, it is now progressing through our parliament.

With these powers, the AER would have the information and visibility to understand both the wholesale electricity market and the wholesale gas market. This continues the trend, as noted by my colleague in the other place the member for Morphett, to increase powers to market bodies. Today, it is the Australian Energy Regulator (AER), but we have also seen powers to the Australian Energy Market Operator (AEMO) and the Australian Energy Market Commission expanded. These expanded powers and visibility are important at a time when we have a cost-of-living crisis, and businesses and families are reliant on keeping their lights on and are currently paying through the nose for electricity with no relief in sight.

Many South Australian households were on default market offers and were forced to absorb some of the highest increases in electricity in the nation as of 1 July 2023. There was a whopping $1,310 jump for some small businesses that were on the default market offers, and for families the hit was some $512. These were massive increases for households that equated to anything up to 23.9 per cent for residential customers and a 28.9 per cent increase for small businesses.

We know from a report by the Australian Energy Regulator that some 60 per cent of South Australian families are on hardship payments for their electricity bill, without receiving any concessions from the government. That percentage is the highest in the country. Sixty per cent of those South Australian families who are on hardship payments for their electricity bills are not receiving any concessions from their government. This is at a time when South Australian families have the highest average energy debt in the electricity market at $1,256.

We know that South Australian families are more than $20,000 worse off, when compared to the last election two years ago. Many others have spoken about the cost-of-living crisis, but similarly I have met with many small businesses which are facing the same challenges, all dealing with rising costs across a number of fronts, including labour costs, water and, of course, power. It all adds to the burden for these people who are keen to be able to do their business well. This is no doubt a major factor in the increased number of businesses failing in our state. They have been smothered by the number of cost increases, and energy is a major impost on these businesses.

As this is the national energy law, it is well supported and will pass the parliament as per convention. I will conclude my remarks and in closing hope that this bill achieves greater transparency and that the market operators can better anticipate and react to future crises with their expanded powers and visibility as well as assist in informing future policy decisions to be put forward to make sure that energy prices decrease.

The Hon. S.L. GAME (17:10): The winter of 2022 in Australia exposed the risks of a poorly functioning energy market. A lack of competition in the electricity market and limited information on the gas market made the situation worse. To address these issues this bill proposes to extend the Australian Energy Regulator's monitoring and reporting functions to include the electricity contract market and the wholesale gas market. This will allow the Australian Energy Regulator to gain insight into competition and market power in these markets. One Nation supports open and competitive markets where improved efficiencies translate to lower energy prices for consumers, and on that basis I support the bill.

The Hon. R.B. MARTIN (17:10): It was Sir Thomas Playford who in 1946 took decisive action to wrest control of South Australia's electricity supply from a profit driven monopoly—the Adelaide Electric Supply Company—with the creation of the state-owned Electricity Trust of South Australia. Playford's approach to economic policy was a uniquely pragmatic one. He was focused on delivering favourable outcomes for the South Australian community. He recognised a good idea when he saw one; it did not matter which side of politics typically espoused it. In InDaily Nigel Carney wrote in 2017 that:

The Playford solution was bold and radical and remains a template for public asset management that is of critical relevance today, as South Australia reels from the negative impacts of perhaps the most contentious and foolish political decision in the state’s history.

Mr Carney refers, of course, to the decision of the Olsen government and its Treasurer, and I quote:

…vandalized the legacy of the Playford era, carving up the Electricity Trust of South Australia…and serving it cheaply to an eager private energy market most pleased to profit from the mismanagement of the state.

The particular criticism that the Olsen government's decision amounted to vandalism of Playford's vision for a South Australia that enjoyed a specific kind of energy security could be written off as politically motivated mudslinging if it were not objectively accurate. When that woefully short-sighted decision was taken it was not a matter of times having changed. Little, in fact, may ever change about the way wealth and profit consolidate under monopolies.

The circumstances post State Bank were both unusual and challenging. That point cannot be argued. A decision was made on the basis of what could be said to be erroneous assumptions about the anticipated effect of privatisation or perhaps made on the basis of very correct but unstated assumptions about the anticipated effect of privatisation. That decision has cost and continues to cost South Australians very far beyond the point that this privatisation could successfully be argued to have served the public interest.

Competition in the electricity market was meant to drive prices down. That was a major selling point offered up to South Australians. Broadly speaking, of course, competition often does exactly that, but something must have gone awry in this case because we have seen a total failure of that effect eventuating in South Australian energy prices today. Prices have instead increased, and I doubt anyone would attempt to argue that this is because the fundamental underlying principle is flawed.

The Malinauskas government is acutely conscious of the pressures that electricity and gas prices are creating for South Australian households at a time of very significant cost-of-living stress. Energy costs since privatisation have created a very significantly rising impost on household budgets, particularly for those on lower incomes.

The intent of the bill before the chamber is to strengthen the capabilities and add to the responsibilities of the Australian Energy Regulator to support its crucial role of ensuring that our energy markets are performing in a competitive manner. The bill provides for the Australian Energy Regulator to be able to access information on electricity contract markets and requires the AER to monitor and report on competition in the wholesale gas markets.

Under the current arrangements, the AER can readily monitor prices on the spot market, which is run by the Australian Energy Market Operator, and the futures market, which is run by the Australian Securities Exchange. The AER relies on the information it gleans which is publicly available, but much of the trading, especially in the electricity market, is conducted through private, bespoke, over-the-counter contracts between generators, finance intermediaries and retailers. These contracts are instrumental in setting the cost of wholesale energy to retailers and therefore significant in their impact on the bills paid by households and businesses.

The lack of transparency around these contracts means the Australian Energy Regulator has great difficulty in the task of accurately estimating what retailers are paying to buy the energy which they then sell on to South Australian households and businesses at retail prices. The bill before us proposes to empower the AER to inspect these contracts to enable them to better ascertain what goes on in energy market transactions.

These reforms are substantially in the public interest to pursue. Labor governments take what actions are available to them to mitigate profiteering at the expense of South Australian consumers. It is worth mentioning that these reforms enjoy broad support and approval, for example from the ACCC, Energy Consumers Australia and the Public Interest Advocacy Centre to name but a few.

A reasonable measure of transparency is necessary for South Australians to ascertain whether or not they are getting a fair deal from their retailers. Amid today's privatised energy landscape, wherein market volatility and commercial decision-making can have such a dramatic impact on retail energy prices, the levers a government can pull are limited. This bill proposes reforms that are entirely in line with our responsibility to the South Australian community to take what steps we can to strengthen transparency in this area. I commend the bill to the chamber and call upon all members to support it.

The Hon. R.A. SIMMS (17:16): I rise to speak in favour of the Statutes Amendment (National Energy Laws) (Wholesale Market Monitoring) Bill 2023. This bill improves the transparency of energy contracts between energy wholesalers and retailers by giving the Australian Energy Regulator monitoring powers to analyse the efficacy of competition and to identify features of contracts that are detrimental to energy supply or cost.

The sale of ETSA back in the 1990s was a major blow to South Australia, exposing the vulnerability in our electricity systems. Now we are in a situation as a result of that appalling decision where we are relying on privatised wholesale and retail markets to provide efficient and affordable energy supply. What we are seeing in energy prices is an increase over time, even though renewable energy has dramatically reduced the cost of producing energy in our state. These increased costs are placing a huge burden on household budgets and putting the viability of small businesses at risk. This is simply not a sustainable situation.

It is for this reason that the Greens have been calling for the re-establishment of a new ETSA to bring power back into public hands and address the ongoing issues of our privatised energy market. Indeed, back in 2022 the Labor Party promised during the election that they would establish a commission of inquiry into bringing back public ownership of our trains and trams. They have not needed to proceed with that inquiry, and I recognise the work of the transport minister in that regard, but we could use that same model to examine the issues associated with our energy network, look at what it would take to bring back ETSA and give South Australians control of our electricity once again.

Local government is starting to take the power back into its own hands. Indeed, the City of Mitcham has become a leader in the energy industry, creating a community renewables program that gives local communities agency and control over their power. I understand that over 760 households have signed up to receive solar panels or batteries and their next step is to establish a virtual power plant. For those who may not be aware, a virtual power plant, also known as a VPP, shares renewable energy generated at individual properties across a local network. It helps prevent blackouts, reduces electricity costs and addresses climate change. As more people move towards models like this, we will see a total shift in our energy market. It is the democratisation of energy generation and distribution.

This bill is necessary for the Australian Energy Regulator to address the lack of transparency in contracts with the big retailers and the big wholesalers. If we were to bring back publicly owned electricity to South Australia and establish more local power networks, as could be achieved through virtual power plants, we could entirely change the energy landscape and entirely remove the need for the types of measures included in this bill. The problem here is not simply transparency; the problem is that the Liberals sold off ETSA to private providers who are more interested in making a buck than serving the public good. We need to see that reversed and we need to put the power back into public hands.

I do want to take this opportunity to caution the Liberal Party against ever going down the privatisation path again. I do welcome the fact that the Malinauskas government has worked with the Greens to support a bill that will make it very difficult to sell off key public assets in the future without appropriate parliamentary scrutiny. That is a really good step, and I think it will ensure that this parliament does not repeat the folly of the Liberals in the future.

The Hon. J.E. HANSON (17:20): Everyone loves a good national energy laws bill, do they not? I rise to speak in support of the Statutes Amendment (National Energy Laws) (Wholesale Market Monitoring) Bill 2023. In doing so, I think it is great that we can all agree here that we are debating a bill that has come about because of a specific failure. That specific failure relates to privatisation. Energy privatisation has, in this instance here, failed. As this side of the council has always said, the privatisation of an essential utility, such as electricity, will not deliver optimal outcomes for consumers. Rather, as then Labor leader Mike Rann said when opposing the privatisation of ETSA:

Privatisation is a policy that will expose South Australians to more and more risk, more and more liability. That is the [then] government's policy: privatise the profits; socialise the risk.

What this bill aims to do is uncover some of the excesses that a privatised system allows to occur—the excesses that ultimately consumers pay for through their electricity bills. If the government still ran the power system, as the Hon. Mr Simms might like us to do, consumers would only be paying for the costs of generating, storing, transmitting and distributing electricity. Unfortunately, this is not the case. Consumers must also pay for private owners and operators to make profits, and pay for speculators—this is a pretty key feature here—who trade financial derivatives of the energy market, not the physical units of energy. This bill will help expose the money trails in those transactions.

It is the role of the Australian Energy Regulator to:

…ensure energy consumers have access to a reliable and secure market and that they pay no more than necessary for energy to their homes and businesses.

That is on the AER website. To do this, the AER must achieve a balancing act of sorts. It needs to ensure that the market is competitive so that small players can enter the market, if you like, and apply innovation against established retailers, and it needs to ensure consumers are receiving as fair a deal as possible.

One of the key functions in this objective is through the AER setting what is called the annual default market offer, or, as some members here have already referred to, the DMO. The DMO is a price cap or a safety net for consumers on basic contracts, which are called standing offers, and it acts as the reference point for all other contracts for households and small businesses, which are called market offers.

In setting the DMO, the AER breaks down an electricity bill into its components: the wholesale cost of electricity supplied by generators, the network costs of transmission and distribution, a small amount for government schemes like an environmental levy or some such, the cost to a retailer of operating a consumer-facing business and, of course, a profit on top for the retailer. Wholesale and network costs are the major components, together comprising about 80 per cent of a retail bill. Network providers are monopolies, and their revenue, including return on any capital and profits, is separately determined by the AER. These costs are therefore well defined in the AER calculation.

Wholesale costs are a lot more volatile and far less transparent. In calling for the reforms in this bill, the AER said:

The proposed changes will greatly enhance the AER's ability to assess performance, competition and efficiency in the wholesale energy markets and ensure consumers are not unduly impacted by high energy prices due to an uncompetitive market.

To ensure consumers and policy makers have confidence in our energy system, it is vital to understand the drivers and impact of participant behaviour and subsequent market outcomes.

In electricity for example, participant behaviour can be influenced by a variety of factors, including their portfolio of technologies, prevailing market conditions, weather, fuel availability, and particularly their risk management strategies and positions.

Every megawatt hour of electricity is treated multiple times in the secondary markets, and the cumulative value of this trade is worth many multiples of the settled spot market price.

Participants also use a range of additional contract products to manage wholesale market risk such as fuel contracts, power purchase agreements, weather derivatives, and carbon abatement contracts.

Currently, the AER can readily monitor prices on the spot market, which is run by the Australian Energy Market Operator and the futures market run by the Australian Securities Exchange, but these markets are only part of the picture. A large volume of trade takes place on the over-the-counter contracts or—another anagram—OTC contracts. Whereas both AEMO and ASX markets have a central clearing house—a pool, if you like, which sellers trade into and buyers trade out of—OTC contracts are privately negotiated arrangements between generators, financial institutions and, critically, retailers.

These OTC contracts are critical to the final cost to retailers of wholesale energy and therefore the final amount paid by households and businesses. This bill before the council gives the AER the power to inspect these contracts to get a more accurate picture of the money flow, to follow the money, if you like. Without these powers, it is pretty much impossible for the AER to do its job.

The importance of wholesale costs in the DMO can be shown in considering the big retail price rises, spoken about by some other members, in the 2022-23 DMO and the current 2023-24 DMO against the draft DMO for 2024-25, which was published last month. I know we all hung out for that one.

In setting the 2022-23 DMO, the regulator said increases in the wholesale costs were accelerating because of the global gas price shock from Russia's invasion in Ukraine, extreme weather in New South Wales and Queensland which disrupted coal supplies, and breakdowns at ageing coal-fired generator plants. These wholesale increases were the principal driver that led to the AER setting a 7.2 per cent increase in the average household bill in South Australia that financial year.

Then, for the 2023-24 period the regulator said wholesale prices had gone even higher. This was because futures contracts had been struck before the Australian government applied price caps on coal and gas. The price of coal and gas had risen, and coal-fired power stations had become even less reliable.

These factors caused the AER to announce extraordinarily large increases for the regions in the National Electricity Market where a DMO applies, that is, South Australia, New South Wales, ACT and south-east Queensland. These increases were above 20 per cent across the board. Nor were those regions the only ones to see steep price rises. Indeed, they were exceeded by a 29 per cent increase in regional Queensland, where the tariff is set by the Queensland Competition Authority instead of the AER.

Then we come to the draft DMO for the next financial year, 2024-25. In some good news for consumers, the AER expects to cut the DMO for average households by 2.5 per cent and by 8.2 per cent for small businesses—something I know a lot of consumers are really looking forward to. Put simply, there is a lot more work to be done to bring down prices, and it is obvious to say it, but it is tremendously encouraging to see them trending down and not up for the coming year. The draft DMO is the forerunner to a final decision to be made in late May, which will apply from 1 July this year.

In announcing its intention to cut prices, the AER said wholesale markets had fallen and stabilised significantly. It notes, to quote them:

For example, as at February 2024, base futures' contract prices have fallen by between 44 per cent and 51 per cent compared with their respective highs in October last year.

In applying this decrease, the AER tempered the fall to 19 per cent, rather than about 50 per cent, in the wholesale component of its draft DMO—with an average residential bill cut from $998 to $809—$189 less on my base maths.

The reason for not applying the full decrease in the spot price is that retailers buy futures-based contracts on the derivatives markets up to four years ahead, and these future prices are still more elevated than the spot market because of a lingering effect of price spikes from the years 2022 and 2023.

Retailers that are not vertically integrated, that is, which do not have a generation fleet of their own, can only buy energy through the spot market, moderated by their trade in derivatives. Because of the volatility in the spot market, they need to be cautious in ensuring the derivatives they purchase shield them from any spikes—how ironic! Unfortunately, because it is a private market, spikes can occur quite legally for business reasons and not for operational reasons.

This process was described by Professor Allan Fels, a former chair of the Australian Competition and Consumer Commission, in a report published earlier in February. The report, labelled 'Inquiry into price gouging and unfair pricing practices', was commissioned by the Australian Council of Trade Unions because, as Professor Fels says, the union movement is concerned about 'the impact of prices on the costs of living of ordinary Australians'—very wise words. Professor Fels chaired the inquiry, which looked in detail at specific sectors of the economy, including of course the electricity sector.

The Fels report says that the electricity wholesale market has a bidding process, which is intended to encourage efficiency and reflect the true cost of supplying electricity at different levels of demand. The process is that generators submit bids to AEMO, which then creates a merit order for dispatch, starting with the lowest price bids and ending with the final bid, under which the aggregate supply will meet the expected total demand during that period of time, if you like. Then, all dispatch generators are paid at the rate bid by the final generator, even if their bids at the start were a lower price. The Fels report states:

…complexities arise in this system. For example, generators can rebid their capacity at different times of dispatch. This flexibility is meant to account for changing conditions, like unexpected plant outages or demand surges. Yet, it can also be used strategically by generators, especially those with significant market power to influence market prices. This has led to concerns about the potential for price manipulation or gaming.

Price manipulation or gaming in our energy market.

The report noted the work of University of Sydney's Professor Lynne Chester that 'this rebidding can take place right up until a few minutes before generators are actually required to supply electricity, and that the incentive to gouge is enormous'—the incentive to gouge is enormous.

So how does this work in practice? Let's consider a few examples. The Australian Energy Regulator is required to issue a report when spot prices exceed $5,000 per megawatt hour. In the AER's January to March 2023 report, it notes a particular event which occurred in Queensland on 31 January 2023. It recorded rebids by generators operated by Alinta Energy and Genuity, including Genuity rebidding from minus $1,000 per megawatt hour to $15,500 per megawatt hour with less than an hour's notice. What did the AER say of these rebids? The AER said:

The short-term strategic rebidding to capitalise on market conditions had the effect of exacerbating high prices in Queensland. While this behaviour may not be a breach of the rules, the ability of these participants to increase price through these rebidding strategies highlights the market power that participants may be able to exercise at certain times.

In the AER's report on October to December, one of the high-price events occurred right here in South Australia on 9 November. On that day, AGL Energy, at 6.39 in the afternoon, changed its bid to supply 125 megawatts of power at 6.45pm, and in the immediate subsequent five-minute trading intervals. So with six minutes of warning, it lifted its bid from a price of less than $176 per megawatt hour to $16,600 per megawatt hour—in six minutes.

How crazy is privatisation? A company says it is quite happy to supply a product at a certain price and then, just moments before that product is needed, it dramatically skyrockets the price. What is the practical effect of that? Instead of making $22,000 for five minutes of providing power, the company makes more than $2 million.

Nor are these companies alone. The AER high-price reports cite numerous companies rebidding in the various high-price events in many different states. The volatility is why the hedging contracts are needed and why they play such an important role in the final prices regular households pay in their electricity bills, and that is why the AER needs the extra powers that we are considering here today. The cost-of-living crisis before us is affected by energy. We have to do something about it, and that is why I commend this bill to the council.

Debate adjourned on motion of Hon. I.K. Hunter.

At 17:37 the council adjourned until Wednesday 10 April 2024 at 14:15.