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).

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.