Home

Sparks fly in energy row

Daniel MercerThe West Australian
Synergy boss Jason Waters.
Camera IconSynergy boss Jason Waters. Credit: The West Australian

It’s a serious matter when the State’s economic watchdog accuses its biggest energy retailer of corporate skulduggery.

Synergy had, according to the Economic Regulation Authority, fleeced the market to the tune of $40 million to $102 million over a 16-month period between 2016 and 2017.

Making matters worse, the State-owned utility had allegedly abused its position as the dominant generator to extract the higher prices, leaving consumers to pick up the bill.

Headlines of price gouging swiftly followed, along with Synergy’s condemnation in Parliament, with the ERA saying it would seek civil penalties via the industry’s independent umpire.

Get in front of tomorrow's news for FREE

Journalism for the curious Australian across politics, business, culture and opinion.

READ NOW

The case has shone a light on the workings of WA’s wholesale electricity market (WEM) and what is fair practice in it.

And according to industry experts, the result of the ERA’s case against Synergy in the Electricity Review Board could set a precedent that reshapes the market for decades to come.

At issue is a multibillion-dollar gas contract that has come to be seen as a millstone around Synergy’s neck.

Signed in 2011 between Synergy and the owners of the massive Gorgon project, led by US energy giant Chevron, the contract replaced long-term take-or-pay arrangements that had been in place with the North West Shelf since the 1980s.

Mines and Petroleum Minister Bill Johnston
Camera IconMines and Petroleum Minister Bill Johnston

It was deemed a reasonable deal at the time, when gas prices were historically high, supply seemed scarce and there were fears of an energy crisis.

Though neither of the parties has spoken publicly about the price paid, figures of $6 to $7 a gigajoule have long been bandied around and never denied.

But as a wave of gas projects, such as BHP’s Macedon and Santos’ Devil Creek, have come on stream in the meantime, the complexion of the Gorgon agreement has taken a distinctly different hue.

Gas prices on the WA spot market are trading at all-time lows in real terms of about $3/gj, a fraction of those prevailing in 2011 and a level buyers on the east coast would kill for.

That gas should be central to the ERA’s case owes to its role in setting the prices paid by everyone in the wholesale market, which serves major buyers and sellers of power across Perth and the South West.

While coal still reigns as the grid’s base-load fuel, it is gas that invariably sets the spot price because gas-fired generators are best able to accommodate the swings and roundabouts of supply and demand during the day.

Not only can gas-fired units be turned on quickly, they can also ramp up and ramp down with ease.

By contrast, coal-fired power plants can do neither, while renewable energy sources such as wind farms and solar panels cannot be controlled or provide secure supply, at least not yet.

Under the market rules, any generator offering electricity when it is deemed to have market power — which could be for a variety of reasons — is only allowed to bid based on what is known as its short run marginal costs.

Economic Regulation Authority chair Nicky Cusworth.
Camera IconEconomic Regulation Authority chair Nicky Cusworth. Credit: Danella Bevis

These essentially refer to the incremental costs of operating power plants and include things such as fuel costs and the costs of starting up a plant.

And it is here where the ERA and Synergy have such wildly divergent views on what constitutes short run marginal cost, or, more specifically, the reasonable expectation thereof.

In its statement outlining the case against Synergy, the regulator said that in thousands of instances the utility charged spot prices that “exceeded” this reasonable expectation and that it had used its position of dominance to do so.

According to the ERA, which is chaired by Nicky Cusworth, Synergy included inflated gas costs to offer correspondingly inflated prices to the market.

What the ERA found, although not in so many words, was that Synergy could have used cheaper gas from the spot market to offer lower prices to electricity customers, but opted for the costlier alternative.

It is a charge that, if proved, could be ruinously expensive for Synergy, with penalties of up to $50,000 for a first offence and $100,000 for each subsequent breach.

For its part, Synergy is flatly refusing to accept the ERA’s logic or the merits of its case.

In its corner is Energy Minister Bill Johnston, who went public with an extraordinary attack on the ERA in the wake of the watchdog’s claims of price gouging.

At a press conference immediately after the report’s release, Mr Johnston panned the ERA’s findings as “disappointing”.

The Minister accused the ERA of operating in a theoretical bubble divorced from reality and for prescribing an interpretation of the market rules that would saddle Synergy — and taxpayers by extension — with tens of millions of dollars in losses.

He went even further in Parliament, launching into an attack in which he said he was “not happy” with the ERA’s report and condemning the regulator for a series of “bad decisions” he said had come at the expense of consumers.

“It has made a series of bad decisions that are costing consumers in this State and holding back the development of the system,” Mr Johnston said.

Synergy, led by Jason Waters, pictured above, was guarded when contacted for a comment.

But it is understood the utility has taken a position that the ERA’s case could have a chilling effect on the market if it succeeded.

The Government-controlled group is believed to have warned that it would be wrong to suggest Synergy could rely on the spot market, claiming it was far too shallow to meet the utility’s needs.

And Synergy has privately criticised what it says is a revisionist view of history.

It points out that the Gorgon contract was written in very different times and security of supply was imperative for a company of its size and importance to households.

One source said all Synergy was trying to do was recover its costs from the Gorgon contract, adding “we’re not asking to make a cent more”.

“The ERA has announced its intention to bring proceedings before the Electricity Review Board,” a Synergy spokeswoman said.

“Synergy is confident that is has complied with its obligations under the market rules and will vigorously defend itself.”

Get the latest news from thewest.com.au in your inbox.

Sign up for our emails