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House of Assembly - Fifty-Fifth Parliament, First Session (55-1)
2024-03-19 Daily Xml
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Statutes Amendment (National Energy Laws) (Wholesale Market Monitoring) Bill

Second Reading

Adjourned debate on second reading.

(Continued from 15 November 2023.)

Mr ODENWALDER: Sir, I draw your attention to the state of the house.

A quorum having been formed:

Mr PATTERSON (Morphett) (12:24): I take the opportunity to speak today about the Statutes Amendment (National Energy Laws) (Wholesale Market Monitoring) Bill and indicate that I am the lead speaker for the opposition on this bill. This bill, like others we have spoken about beforehand, is another batch of reforms coming from the Energy Ministers' Meeting, and it seeks to amend both the National Electricity (South Australia) Act 1996 and the National Gas (South Australia) Act 2008.

The main intent of the bill is to provide the Australian Energy Regulator with new gas and electricity contracts market monitoring powers. The aim stated is that the AER has the information and visibility it will then need to understand both the wholesale electricity market and the wholesale gas market. In terms of how it has arrived here in the South Australian parliament, this initiative has been in the pipeline for some time, going back to the Australian Competition and Consumer Commission's June 2018 Retail Electricity Pricing Inquiry.

In their final report, they recommended that the AER's wholesale market monitoring should be expanded and appropriately funded to include monitoring, analysing and reporting on the contract market. Of course, after that report in 2018 the Energy Security Board in their July 2021 Data Strategy also recommended expanding the Australian Energy Regulator's powers and monitoring capabilities for wholesale markets, as proposed by the ACCC and agreed to by ministers, to ensure more effective markets and consumer protections.

That work has been, as I said, in the pipeline for a while. It now arrives here in our parliament based upon the fact that South Australia is the lead legislator for the national energy laws, and so the changes to the wholesale market monitoring are being introduced here. Of course, as on previous occasions the convention for such changes to the national energy laws is that these legislative amendments are supported by the opposition, and so I indicate that the opposition will be supporting this bill.

As I said in my earlier remarks, this place has considered reforms to both the gas and electricity markets, with past amendments such as the east coast gas system amendments, consumer data right protection, gas pipelines, market transparency and also ministerial powers. There have been amendment bills dealing with those matters.

As part of the consultation with stakeholders, it was pointed out to me by one of the stakeholders that this reform that we are seeing here continues the trend of gas and electricity market reform delivering market transparency and increased powers to market bodies, in this case the Australian Energy Regulator but in other cases that I mentioned, the Australian Energy Market Operator or the AEMC.

This is being done in an attempt to address supply issues over the last two years. They will tell these market bodies more about what is going on. You would think, yes, that that is important, and you certainly would not get an argument from many in regard to that. But it also is putting more and more compliance burden on industry—the stakeholders in this, whether it is the gas producers, the gas pipelines, the generators or retailers, as well.

As I said, there has been effort in here, but there does not seem to be a corresponding effort to actually address the fundamental issue, as I talked about before—the supply issues. There has been no effort to increase supply by getting more gas out of the ground and into the gas markets, nor is there more baseload electricity generation in place before retiring coal-fired power generation. We know that these supply constraints have inevitably led to higher prices.

We know that South Australian working families are struggling with higher power prices, and they are looking for relief. They are at breaking point and they are pleading for relief. So, rather than the energy ministers looking to address things that are going to really shift the dial and getting prices down, what we are getting are these sorts of measures here. This is what they have been effectively served up with, and it becomes just a drawn-out process.

What I am hearing from people in my community down in Morphett, and from people in many other electorates as well, broadly across South Australia, is that a lot of customers can certainly tell the market bodies what is happening just by looking at their power bills. On the weekend I was at a business where their power bills have gone up massively. Previously, two years ago, the bills were around $2,000 per quarter, and now their most recent bills are up to $5,100 a quarter. They can tell just by looking at their bill what is going on, and they could quite happily pass on to the AER that there are big issues going on in terms of their power bills that need to be addressed appropriately and urgently.

The AER does a number of reports. At the end of last year it put out its annual retail markets report and in that it gave a breakdown of the composition of residential electricity and gas bills. If you look at what the report said in terms of gas bills, it rightly highlights that wholesale costs contribute approximately 33 per cent to customers' gas bills, network charges make up 43 per cent of the bills, and the remainder is the retail. Additionally, if you look at the breakdown of an average electricity bill, around 35 per cent of the cost of those bills are network charges, about 43 per cent of the costs are to do with wholesale power, and the remainder relates to both retail and environmental programs.

That is the breakdown and it gives you a bit of an idea, I suppose, about this bill, if it is looking at wholesale transparency or market monitoring. In terms of the electricity market, it is looking at about 43 per cent of the underlying costs in household power bills. In terms of gas, it contributes about 33 per cent, so it is dealing with about 33 per cent. Again, effort needs to be put in to make sure that the overall bills are coming down.

I will talk a bit about electricity and how that works in the wholesale portion. It is bought and sold through the national energy markets. There is the wholesale spot market for selling electricity and there is also the transmission grid to transport the energy to customers—to the major metropolitan networks and the urban centres—and, within that, there is the distribution network as well. In the case of SA, it is SA Power Networks.

In terms of the wholesale side of things, on the spot market, the price can fluctuate wildly. A cap is in place, though, to make sure energy prices do not become off the scales. Even so, prices can go up to $16,660 per megawatt hour when you have periods of really high demand and low generation. Similarly, when there is a saturation of generation, as happens during the day when it is very sunny, there is a floor price of negative $1,000 per megawatt hour. You would think, 'Why would there be negative prices?' With the increase in renewables, there are really wide variations in price, as I said, going from negative prices during periods of really high solar output combined with wind through to very high prices when there is no wind and solar generating into the system and, concurrently, very high demand as well.

One of those situations happened only a couple of weeks ago here in South Australia. Spot prices were up at the capped amount of $16,600, and it coincided with a hot day. Towards the end of the day, when there was no solar and the wind was absent as well, this caused big price spikes. That feeds through, unfortunately, into people's bills and businesses' bills. The system is having to deal with a lot of intermittency.

The original system was built, as I have commented before, at a time when you had a centralised power system based upon coal-fired power stations that would run predominantly all day, and then they were supplemented by gas to deal with the peaks and troughs predominantly when people are waking up and businesses are starting and, similarly, as people are coming home. That has been upended with intermittent renewables, and so we have the spot market going up and down, sometimes a number of times in the one day. Because of this, because it can go up and down so much, it really is incumbent and sensible for any retailer that is trying to purchase electricity to then onsell to their customers to try to protect against these wild fluctuations.

It is very hard to plan a business around a weather forecast a few days in advance. Ultimately, the weather now has more and more of a role in terms of dictating what the overall spot price will be, because not only does it impact on the demand, which was the traditional driver of demand—on cold days people put their heaters on, and on hot days they put the air conditioner on—but now also the supply side is being more and more influenced by the weather.

As I said, it would be very difficult for retailers to plan what your electricity purchase would be over the next three days or the next week based upon weather forecasts. They can have a bit of a guide, but it really makes it next to impossible to try to predict in advance six months or 12 months what the weather could be.

Hence, what retailers look to do is contract over longer periods of time or hedge with generators in advance to lock in a firm price for electricity to be supplied into the future. It works well for both parties. These hedging contracts can be traded publicly as standardised products on the ASX, but more likely as bespoke agreements directly between the two parties. These are known as over-the-counter contracts. Because they are between two parties, they will be customised to their needs, taking into account what their customer base is, what their demand profile is, which they understand, and then making sure that they will be able to supply to the demand regardless of the conditions. It puts the onus on the generators to then provide it. By doing this it does provide more certainty and it also manages the exposure to volatility.

As I said previously, the over-the-counter contracts work for both the purchasers, the retailers, and also the sellers of the product: the generators. From a retailer's perspective, the retailers can manage their wholesale market price volatility for their customers. They can lock in a firm price for electricity to be supplied into the future. That allows for them to then in turn give stable pricing for their customers, because customers do not want to have to think on any particular day about whether the rate of electricity they are going to be purchasing will be going up or down. It is much easier for them to know that it will be not exposed to this sort of volatility.

In terms of the generators as well, the advantage of these over-the-counter contracts means that it reduces their exposure and risk as well, and allows them to lock in future revenue. As I said, these contracts go out for six months, 12 months and even more. It gives them revenue streams, it allows them to provide forward budgets and, additionally, can underpin their investment into new generation. If they know they have this revenue coming down the line, that will justify new investment. Certainly, there is a need for new investment in generation—it is very important—especially if that generation is base load power as well. We know that that will help to stabilise prices as well and reduce the peaks and troughs that are going on at the moment.

In terms of these contracts, a lot of the ASX products are publicly listed, so they are available for the AER to look at. The AER does not presently have the power to look at the over-the-counter contracts bespoke agreements between two parties. They cannot look at them. They do not have the power to request these contracts for monitoring purposes, and so a large part of the bill that has come before us deals with that by giving the AER the powers to gather information about electricity contracts and also financial risk management products using the expanded information-gathering powers considered in this bill.

I talked earlier about gas. The average wholesale composition of a bill is around 33 per cent. In terms of how that plays out, most of the gas that is bought and sold in the Australian domestic market is done so under gas supply agreements (GSAs) between producers and also the users of gas, predominantly contracting the amounts of gas over a time period as well. A smaller proportion of the total gas supply is traded in markets run by the Australian Energy Market Operator in a number of forms: short-term trading markets, declared wholesale gas markets and also the Gas Supply Hub exchange.

Again, this bill before us also makes changes to expand the AER's powers to monitor and report on the wholesale gas market. Principally, it is similar to the changes that will occur with the market monitoring for the electricity markets as well. Not only is gas important in its own right, for industrial uses and for homes as well via the retailers for home consumption, but of course it is also very important in the electricity generation mix. It is a flexible fuel and can be used in peakers to come online fairly quickly and it helps firm renewables as well.

When I talked before about intermittency and prices going up and down, gas plays a very significant role in allowing renewables to be firmed as well. In fact, in the latest version of AEMO's Integrated System Plan that has been put out for consultation they forecast that, as renewables roll out, the amount of gas generation will increase from their original forecast back in 2022, which was 10 gigawatts, to 16 gigawatts.

You can see that it is recognised by AEMO how important gas is to the market and so, as I have said in previous speeches around some of the powers given to these market bodies, there needs to be a lot of effort put into trying to address the supply issue because, if we are going to have that much gas going into the electricity market, we need to have gas that is cheap and is not pushed up in price because the supply has been artificially reduced by governments.

Certainly, the Victorian government is a big culprit in terms of that. We know that the southern basins are declining, so there needs to be replacements for those. South Australia has a pipeline of SEA Gas coming from that region, so it is inextricably linked to those basin declines. We do need more supply coming into the market as we go forward, as the Australian Energy Market Operator's ISP lays out in detail. We have the northern basin and certainly significant ones in Australia and ones in Queensland and New South Wales that should be brought to market and that principally will certainly help the whole of Australia in terms of dealing with the supply of gas and therefore the actual prices that flow through as a result.

The other aspect of the point made is that, as there is more intermittency and unpredictability in the electricity generation mix, the ability to contract gas in similar amounts on an ongoing basis is getting changed. Certainly, consumption has become more volatile and that has brought changes into the contracting that is going on—these gas supply agreements between parties—so we need to make sure they are allowed to continue and be flexible as changes in the market unfold.

If I move on to some other changes in the bill, it also causes the AER to prepare a report on the results of its wholesale market monitoring function at least once every two years. We already have reports into wholesale power and gas prices by the AER. It also releases a wholesale markets quarterly report. If you cast your minds back to when this amendment bill was introduced into parliament last year, at the time the AER had just released their quarter 3 of 2023 wholesale markets quarterly report. At the time, it certainly did make for sobering reading not only for households here in South Australia but also for small businesses.

When I look at what was laid out, these are the average wholesale quarterly prices averaged over the whole quarter. In terms of the quarter 3 of 2023 numbers, it showed that SA had the highest quarterly average wholesale power price in the nation. It was $114. When you compare that with some of the other states, New South Wales was next at $89 per megawatt hour; averaged over the quarter, Queensland came in at $74; Victoria had $59; and Tasmania had $31 per megawatt hour. You can see that South Australia was head and shoulders above the other states.

That was and is having a material effect on the power bills that South Australians ultimately have to pay. As I mentioned before, the AER said that on average wholesale prices make up about 43 per cent of customers' electricity bills. Of course, we had the minister coming out and saying the problems are a result of the war in Ukraine. As time has gone by, what we have found is that really became a catalyst, but the underlying issue was a lack of gas supply, and that tipped it over the edge.

If you look at what the wholesale prices were in quarter 3 of 2021, which was of course pre the Ukraine war, and look at South Australia versus the others, South Australia's wholesale rate averaged over quarter 3 in 2021 was $63 per megawatt hour. Comparing with the other states, New South Wales had $88 per megawatt hour, Queensland had $90 per megawatt hour, Victoria had $64 per megawatt hour and Tasmania had $27 per megawatt hour. Comparing those prices back in quarter 3 of 2021 with the prices in quarter 3 of 2023, you can see that all other states had gone back down by that stage.

So the issue around any bubble because of Ukraine had passed those states by, but in South Australia we still had very high wholesale electricity prices, well over and above what they were two years previously in quarter 3 of 2021. While all other states in the National Electricity Market had seen their wholesale prices fall since the start of 2023, South Australia was the only state that had seen its wholesale prices increase. At the start of quarter 4 in 2022, South Australia's wholesale price was $80 per megawatt hour, so it had gone up from $80 to $114.

The other point out of that is that it clearly shows that while we have the Premier trying to constantly deflect responsibility for massive power bills in South Australia by saying it is an east coast energy crisis, you can see that in terms of the wholesale prices, all the states had been able to revert back to comparable to what they had two years prior, except for South Australia. The Premier really needs to acknowledge and admit that these power prices show that it is a South Australian crisis. It cannot be passed off as an east coast crisis.

I talked about the quarter 3 wholesale numbers in 2021, when they were much lower than those of quarter 3 in 2023. That played a big role in the reduction in power bills that occurred under the former Liberal government. I have said previously that, according to the ESCOSA report, we saw power bills reduce by $421 over the term of the former Liberal government after inheriting surging electricity prices from the Weatherill Labor government. The current energy minister was the energy minister in that government as well. Prices were going up. Now we have prices going up again, with the same minister in charge.

Going back to those prices in quarter 3, pointing out that the prices were high, we had the minister on radio saying, 'They were high because there were issues with the interconnector for two days and that would have increased prices by about $20.' He said, 'If that hadn't been the case then we would have been below a lot of the other states.' Again, referring back to the costs that I outlined just before, South Australia had average quarterly prices of $114 for that quarter 3 and the next highest was New South Wales at $89. Even if you took off the $20, that had South Australia at $94 so it still would have been the highest in the nation. It is not good enough to try to blame and shift the blame onto other things. The minister and the government need to take responsibility for this, they really do.

As I said before, when I went back to look at those quarterly prices again, going back to quarter 1 of 2023 the price in South Australia was an average of $99 per megawatt hour. As I said previously, in quarter 4 of 2022 the price was $80 per megawatt hour, so again we are seeing an increase from quarter 4 of 2022 to quarter 1 of 2023—and in fact, SA was the only jurisdiction to experience an increase in their wholesale prices between quarter 4 of 2022 and quarter 1 of 2023.

There are underlying issues there. Both that increase there and also, as I said, the quarter 3 wholesale prices being the highest in the nation, are a huge concern, especially the quarter 3 one because that came out in the period of July to October and came on the back of a massive jump in the default market offer that occurred back on 1 July 2023.

South Australian households that were on market offers were forced to absorb some of the highest increases to electricity prices in the nation on 1 July 2023. Households copped big blowouts of up to $512 extra per year for the average household on a default market offer, while there was a whopping $1,310 jump for small businesses that were on these default market offers. These were massive, massive increases for households and equated to anywhere up to 23.9 per cent for residential customers and 28.9 per cent for small businesses.

That heaped additional pressure onto those families and small business owners and, of course, these increases also came on top of increases that had happened in the previous default market offer (DMO), DMO-4, which came in on 1 July 2022. Households in that DMO had prices go up by $198—nearly $200—in the previous year's default market offer. The result was, back on 1 July 2023, South Australian households had the highest increase to their power bills in dollar terms. Likewise, businesses certainly had the highest increase in their power bills, both in dollar terms and also in percentages. This left them paying some of the highest prices in the nation.

At the same time, last year AEMO warned that South Australia is one of the jurisdictions that has the highest chance of blackouts as well. We were warned that blackouts had a much higher chance of happening here in SA than in other states. I notice the time and I seek leave to continue my remarks.

Leave granted; debate adjourned.

Sitting suspended from 13:00 to 14:00.

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