Power Failures in Melbourne… Bush Fires or Energy Crisis?

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MELBOURNE AUSTRALIA 17 January 2007 – Is it time to enter the dark world of the conspiracy theorist?  Was yesterday in Melbourne a sign of the future?  Have we witnessed the first signs of the Energy Crisis?  Was it really the fault of bushfires, or was it perfect cover for the power suppliers to ‘turn the lights off’ for a few hours to get some practice for when the real event occurs?

Given that electricity supply is such a regulated market, could this comment from Reuters also provide them with another motive, “Australian spot power prices rocketed in Victoria and South Australia states on Tuesday due to the high demand.”

Now, we don’t profess to be the leading commentator when it comes to the machinations of the inter and intra State electricity market, but it would seem not illogical if the electricity companies were faced with paying astronomical prices which they would be unable to pass on to their customers, that they may as well accidentally pull the socket from the wall and blame it on the bush fires.

Is there any coincidence in the timing of the ‘cut’?  4pm.  Late enough in the day that office workers wouldn’t have faced too much discomfort as air conditioning systems powered down, yet early enough for it not to have too much of an impact on the commuter train services, a satisfactory fifteen minute delay in your correspondent’s case.

Odds are that the ‘cut’ to the supply line between Victoria and New South Wales will have been miraculously fixed up by today with electricity services having returned to normal.

But all this would be too far fetched of course.  Even so, there is an odour out there and it wasn’t all due to the sweaty armpits your correspondent was sharing the train home with last night.

Whether it was an accident or a conspiracy, one thing is clear, it demonstrates that nowhere is there any decisive, visionary plan in place to tackle a real energy production and supply crisis.  If this is the best they can offer, rolling black-outs, it will display a complete lack of leadership and willpower from everyone involved.

It is the same with water.  Rather than coming up with some serious and bold policy initiatives on ensuring sustainable levels of water supply, the government instead chooses to authorise a leak that suggests the taxation of rain water captured by domestic storage tanks could be on the cards.

It was obviously a proposal that the government was seriously considering.  But rather than research the pros and cons, the costs and benefits in detail, and then present the argument to the public, it decides to leak an email to the price and then sit back to see what the public reaction to any such proposal would be.

It is the oldest trick in the political book.

Not surprisingly, given the lack of supporting arguments for the draft proposal, it was soundly condemned by all and sundry.  To no-ones surprise the ‘Water Minister’ Malcolm Turnbull issues a press release denying it was ever a part of a government proposal.

At least we know where we stand and where those supposedly in authority stand.  It may be too early to be stocking up on the tins of baked beans, but at least make sure you’ve got a can opener that works.

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Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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  1. Power Failures in Melbourne No Energy Crisis

    Kris Sayce’s article questioning whether the Power Failure in Melbourne on 16th Jan 2007 was caused by a mass conspiracy of the Energy companies demonstrates the author’s complete lack of understanding of the mechanics of dispatching generators within the National Electricity Market.

    All generators must submit scheduled maintenance outages well in advance to the National Electricity Market Management Company (NEMMCO). NEMMCO is responsible for the operation of the market including issuing dispatch instructions to generators. Generators are dispatch based on price bidding, with the lowest priced bid being dispatched first until the total supply of electricity matches the forecast demand. The pool price is set by the highest bid that has been accepted. All generators supplying electricity receive the state’s half hourly pool price. Those generators that are not running receive no revenue. Retailers pay the pool price for the total half hourly consumption of their customers. Transmission and distribution companies receive revenue based the energy transported at set tariffs.

    At first this may appear that the generators dispatching “win” over the retailers if the pool price is high and the opposite occurs when the price is low. However, the cost of building generation capacity is significant resulting in large fixed costs attributable to interest repayments. Generators, therefore, require a steady and reliable stream of revenue to be able to repay creditors and investors. This creates a need to enter into over the counter (OTC) derivative deals with counterparties which act to hedge the floating pool price against a fixed price. As retailers require the pool price to be lower than the price paid by their customers in order to make a profit, they are the primary counterparties of the OTC hedges with generators. Retailers may also build peaking generators to hedge against high pool prices, as it allows the flexibility to generate during high demand which acts to suppress the pool price.

    With OTC deals in place, generators are no longer driven to raise pool prices. If the pool prices do start to rise, retailers will dispatch their peaking generators in order to stop the pool price from further rising. Cutting electricity supplies serves neither the interests of the retailers or the generators. Retailers lose customer revenue while the generators lose revenue from not generating.

    A state’s energy capacity is determined by market forces. Slightly raised long-term pool prices indicate to investors that building new generators would be a profitable exercise. Victorian energy supply is also available from neighbouring states via interconnectors with South Australia and New South Wales. In addition a new interconnector between Victoria and Tasmania became available in May 2006. The incterconnector with Tasmania provided valuable additional generation supply to Victoria when the transmission lines to New South Wales tripped on the 16th January, preventing even larger black-outs across the state. Tripping, the unscheduled outages of generators or electricity lines, occur infrequently and require NEMMCO to quickly restore the security of system. A tripping of a major interconnector which was supplying 20% of Victoria’s electricity at time is unprecedented. Such a large contingency event required immediate action by NEMMCO to prevent a complete collapse of the grid. Almost immediately additional supply was required from Victorian, Tasmanian and South Australian generators. Unfortunately, technological constraints prevent generators from instantaneously responding to such events as it takes time for generators to commence or increase their supply of electricity.

    In summary, even with the above simplified overview of the mechanics of the Australian electricity market the facts clearly support that there is no motive for a mass conspiracy between competing energy companies nor is there currently an energy crisis. Unfortunately, we must recognize that our state’s electricity supply is at the mercy of “acts of god” and in rare circumstances blackouts are an inevitable consequence of this.

    Further information on how the National Electricity Market works is available from the NEMMCO website at
    http://www.nemmco.com.au/nemgeneral/NEM_general.htm

    The statements contained within this article represents the author’s personal views and not those of her current employer.

    Reply
  2. Further to Melissa Perrow’s comments, here is a time-sequential review of what actually happened on the day:

    http://www.nem-watch.info/summer/review/2007-01-16.htm

    See the price volatility that occurred on the day for yourself.

    The NEM is a very volatile commodity market through which around $7 billion each year of energy is traded (and delivered).

    Reply

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