The power of concentration: How a shortage of energy suppliers inflates your bill

Menzies Research Centre's picture

There are too few companies generating electricity in the National Electricity Market. In each state in the NEM (which includes all states except Western Australia) the combined market shares of the two or three most significant generators is more than 70 per cent.

The closure of Hazelwood and Northern increased this level of concentration in Victoria and South Australia, and pushed overall capacity closer to demand. This enabled generators with high market shares to increase prices knowing that their energy would be dispatched, says ACCC chairman Rod Sims.

Sims says changes in bidding patterns by coal-fired generators had appeared at times to be unrelated to the cost of production.

While such behaviour is clearly allowed under the rules, there is doubt about whether the rules ever envisaged a generation market as concentrated as what we now have,” he says.

“Generator market power was clearly seen in Queensland with two generators having two thirds of capacity and prices spiking. When the Queensland government directed its generators to tone down their bidding, prices immediately reduced significantly.”

TEN REASONS: Why energy policy is broken in Australia

Reform of the electricity sector in the 1990s involved separation of state-owned vertically integrated utilities into generation, transmission, distribution and retail businesses. This exposed generation businesses, and subsequently retail businesses, to competition for the first time. Vertical separation was a key component – explicitly considered when states embarked on this reform. However, in subsequent years, generation and retail businesses re-integrated through mergers and acquisitions, albeit without ownership of the separately owned and regulated monopoly networks. Today there are over 300 registered generation units in the NEM. However, ownership and trading rights are concentrated.

A single generator in Tasmania accounts for 86 per cent of that state’s generating capacity. On the mainland, the three largest generators account for roughly three quarters of generating capacity in each NEM region outside Tasmania, other than New South Wales, where they account for 62 per cent.

In the retail space, 2016 estimates suggest that three retailers (AGL Energy, Origin Energy and EnergyAustralia) supplied electricity to around 70 per cent of the 9.3 million residential customers in the NEM.

In NSW, Victoria and South Australia, their market share in generation is much higher, while in Queensland a government monopoly is in place.

Market power is harmful to overall efficiency in a number of ways: it distorts short-term production and consumption decisions; in the longer term, it induces inefficient investment decisions, such as decisions regarding location or technology choices for new generation; and it may also significantly increase the volatility of electricity spot market prices, undermining the political sustainability of electricity market reforms.

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