Australia Power Player Calls Out Traders Who Can't Back Up Deals

(Bloomberg) -- EnergyAustralia, Australia’s third-largest power producer and retailer, wants regulators to ease market volatility by ensuring traders can only sell power that’s backed by the nation’s generators.

The country is grappling with price spikes and tighter power generation capacity, spurring Prime Minister Malcolm Turnbull’s National Energy Guarantee program, designed to stabilize supply. Those new policies should rein in traders who are selling more power than the country can generate, said Mark Collette, the company’s executive for energy.

The market needs “some checking mechanisms to make sure the aggregate sales of electricity are ultimately supported by physical generation,” he said in a phone interview.

The country has lost about 10 percent of its generating capacity over the last two years as older facilities shut, including Engie SA’s Hazelwood coal-fired plant in Victoria. Electricity futures trading spiked last year on the Australian Securities Exchange amid unstable supplies from the grid and unplanned outages.

Energy Australia on Feb. 6 wrote to the nation’s power grid rule maker, the Australian Energy Market Commission, asking for the issue to be considered as part of an ongoing review into the reliability of the national electricity market.

EnergyAustralia’s pleas may not find a sympathetic audience. The agency developing the National Energy Guarantee said last year that the market dominance of Australia’s big three electricity retailers -- EnergyAustralia, AGL Energy Ltd. and Origin Energy Ltd. -- needs to be examined to ensure functioning and competitive markets.

‘Ongoing Volatility’

And price volatility may be more a result of the closure of coal-fired power stations, which tightened electricity supplies, according to David Lennox, a Sydney-based resources analyst with Fat Prophets.

“Whenever we do see power brownouts, there’s a competition to get hold of supply and prices are naturally going to rise,” said Lennox. “These coal stations have been around for decades so there’s going to be ongoing volatility in the grid given their age and need for constant maintenance.”

Westpac Banking Corp., one of Australia’s big four banks, said its role as a trader helps boost liquidity in the market at a time when large energy users have experienced up to 300 percent electricity bill price increases over the last few years.

“Westpac is helping these corporate customers to hedge their exposure to price volatility and avoid the bill shock that comes with those long, hot days in summer,” said Connell Burke, executive director for commodities at unit Westpac Institutional Bank.

Total futures volumes of 198 terrawatt hours were traded last year for contracts covering 2017 to 2020, according to the Australian Energy Market Operator. That compares with physical demand in the national electricity market in 2017 of 180 Twh.

The national electricity market requires "healthy derivatives" trading, AEMO said in an emailed response to questions. "We’d be more concerned about declining liquidity than trading that is done without physical assets.”

To contact the reporter on this story: Perry Williams in Sydney at pwilliams113@bloomberg.net.

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Aaron Clark

©2018 Bloomberg L.P.