21/09/2015 - 11:32

Rules questioned amid ‘market power’ claims

21/09/2015 - 11:32

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Claims of excessive prices have uncovered a deeper frustration surrounding aspects of WA’s electricity market rules.

Rules questioned amid ‘market power’ claims
DEMAND: Muja power station typically runs one, and sometimes up to three of its power-generating units.

Claims of excessive prices have uncovered a deeper frustration surrounding aspects of WA’s electricity market rules.

A bill of more than $10 million to electricity retailers for broken Western Power equipment, and a state-owned generator’s undisclosed millions in losses, have highlighted flaws in the wholesale electricity market rules.

Business News can reveal the failure of a major transformer, which took seven months to be repaired, has resulted in a situation so complex that an Economic Regulation Authority determination about subsequent alleged abuse of ‘market power’ has been delayed three times, with a verdict now expected to be delivered at the end of October.

In July 2014, the ERA was tasked with deciding if Vinalco Energy, the Synergy-owned Muja power station operator, had ‘market power’ after a transformer failure rendered it the only stationary generator requested to provide the majority of power to Albany and the Great Southern region.

The case hinges on whether Vinalco breached a clause in the market rules, submitting bid prices in excess of “reasonable expectation” of how much it actually cost it to generate the extra electricity.

The large and ageing Muja power station has eight power-generating units falling under the categories of Muja A, B, C and D.

Synergy is responsible for four units under C and D and under normal circumstances Vinalco runs one and sometimes up to three of it's four units of Muja A and B.

Following the Western Power transformer failure, System Management, the entity that schedules generators and manages the real-time operation of Western Australia’s power system, requested that Vinalco use three of its units more regularly and for longer periods than normal practice until the transformer was fixed.

While Vinalco is alleged to have exercised market power by bidding at prices higher than its actual costs, it claims the episode cost it several million dollars, in large part due to a complicated set of rules concerning ‘constrained-on’ payments for ‘out-of-merit’ generation.

Vinalco has criticised the hard-to-calculate and delayed nature of ‘constrained-on’ payments and strenuously denied it had market power.

“Vinalco’s pricing behaviour is ... aimed to ensure Vinalco avoids incurring losses,” Vinalco general manager Paul Gower wrote in a letter to the Independent Market Operator.

“The fact that the Muja AB facilities would not have been dispatched, but for System Management’s regulatory intervention, demonstrates that Vinalco did not and has no market power in any relevant sense,” Mr Gower said. 

The IMO, which referred Vinalco’s behaviour to the ERA, had previously flagged the current rules regarding the procurement of ‘out-of-merit’ generation, which is designed to provide temporary relief measured in 30-minute increments, and not for months, could lead to “possible inefficient outcomes”.

In 2014, it said the process could lead to inefficiencies, such as payments to a generator that “may not recover the (actual cost) of that facility” and “market customers (not) easily predict(ing) the costs associated with the constraint payments to market participants”.

It is this last outcome that led to WA electricity participants such as Bluewaters Power, NewGen and Synergy sharing a $10 million plus bill for the increased costs associated with paying for Muja’s extra generation.

It’s understood participants are upset with the size of the tab, the largest of its kind since the rules for ‘constrained-on’ payments came into effect in 2012, and the financial burden they had to bear from a situation arising because of broken Western Power equipment.

While Vinalco has defended the higher price of its bids into the market, which it says ultimately did not cover all of its costs, it’s understood that an unexpectedly large fuel bill also contributed to Vinalco’s losses.

Muja is believed to have contracted for only enough coal for what it was originally planning to bid into the market; after being called for extra generation, it had to procure emergency supplies at significant expense.

While some have questioned why Vinalco was not privy to extra, less-expensive fuel from its parent company and fellow state-owned entity Synergy, it’s understood Vinalco does not have access to Synergy’s coal supplies and its coal contracts are kept completely separate.

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