The power industry has been grappling with regulatory uncertainty in relation to carbon since late 2004 when Australian state governments committed to the introduction of an emissions trading scheme. This article estimates the additional cost to electricity users associated with the sub‐optimal introduction of new power generating capacity given regulatory delays. We find the costs to be significant; under a business‐as‐usual electricity demand growth scenario, prices in 2020 would be about $8.60/MWh higher than necessary. We also find that costs to consumers are lower where complementary policies are introduced to encourage energy efficiency and renewable energy.
Energy-only markets have an inherently unstable equilibrium, even under ideal conditions, because participants are unable to optimise VoLL events. The addition of intermittent renewable generation is thought to make conditions harder. In this article, optimal VoLL events in an islanded NEM region is modelled by substituting high price caps for Boiteux capacity charges, then analysing the impact of adding progressively more Variable Renewable Energy (VRE)up to 35% market share. Spot market conditions prove stable and tractable provided thermal plant exit and adjust perfectly. But VRE asset allocation is important; absent highly elastic demand or ultra-low cost storage solar PV market share has economic limits because the technology rapidly cannibalises itself. Furthermore, as VRE rises in imperfectly interconnected regions, a tipping point appears to exist where the hedge market enters an unstable zone through shortages of 'asset-backed' firm intra-regional swaps and caps. Government-initiated CfDs for VRE need to be designed carefully to ensure any instability is not exacerbated by extracting contracts from an already short hedge market.
Energy-only markets are prone to the Resource Adequacy problem, i.e. the timely entry of new plant. The reason for this is that competitive energy-only markets struggle to be remunerative given reliability constraints and market price caps. Historically, Australia's 45,000MW National Electricity Market has managed to navigate this well understood problem, albeit with government entities directly or indirectly responsible for a surprisingly large 73% of all new plant investments to 2007. But government involvement in direct investment has now ceased. So what will enable the industry to navigate the Resource Adequacy problem into the future? Quite simply, industrial organisation, the presence of firms with investment-grade credit ratings and setting any regulated retail prices or 'price to beat' with an LRMC floor.
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