How the energy market broke and forced AEMO’s hand

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The introduction of a price cap across Australia’s east coast wholesale electricity market was unprecedented, but it got worse before AEMO stepped in.

After weeks of wild swings in the wholesale gas price, the introduction of a nationwide price cap on Monday was supposed to offer a red-hot market a circuit-breaker.

It is disappointing that energy generators were potentially gaming the system and not utilising the options available to them.That threshold was breached in Queensland on Sunday for the first time. But by the end of Monday, it was also in place across the entire east coast for the first time.Although this is below the cost of producing electricity for many generators, the Australian Energy Market Operator had a system in place to ensure companies could recover their costs.

The situation was wrangling regulators and policymakers. AEMO was desperately unsure about the capacity of any generator at one time, and this lack of transparency was fuelling frustration.veiled threats to generators to increase offers of supplyBut the situation did not improve, and by Tuesday, amid further warnings of blackouts, albeit mostly on paper, regulators had had enough.

AEMO did not need the approval of governments, though nobody objected, sources familiar with the discussions said. “We are creating a simple process where AEMO has true visibility of which generators are available and when, in advance, rather than relying on last-minute interventions.”

 

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Show me a price cap set below the market price, and I'll show you a shortage. It is quite literally in all Microeconomics 101 courses. Why is everyone acting surprised?

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