The South Australian wholesale electricity market had a volume-weighted average price of $433/MWh for the first two weeks of July. By way of comparison, the volume-weighted average wholesale price in South Australia for the last eight calendar years has been $64/MWh. Extraordinarily high prices (greater than $2,000 per MWh) occurred in July for numerous half-hourly settlement periods but particularly on July 7th and sporadically also for various half-hours on the 6th and 8th and again roughly a week later.

In response to these events we have been asked to analyse and report on what occurred in the wholesale market in July 2016. Extraordinarily high wholesale prices in the spot market are not unusual in South Australia. These extraordinary prices do occur sporadically and often when demand is far below annual peaks. However, it is unusual to see so many intervals of extreme prices in winter as has occurred this July when demand has been barely higher than average annual demand.

We think the explanation for these extreme price outcomes is clear. There was no genuine capacity shortfall at the time of the extreme prices, the installed (and not mothballed) generation capacity far exceeded the demand. AEMO had forecast extremely high prices12 hours in advance, and if they had wanted to, South Australia’s gas and diesel generators could have prepared their plant to produce. In other words, despite the absence of wind generation and the limitations in interconnector capacity, there was still plenty of generation capacity that was available, or could reasonably have been expected to be available, at the time that these extreme prices occurred. Had this capacity been made available to the market at more reasonable prices, even prices far above production costs, those extreme prices would not have occurred.