Vertical integration, credit ratings and retail price settings in energy-only markets: Navigating the Resource Adequacy problem

Abstract

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.

Delayed Carbon Policy Certainty and Electricity Prices in Australia*

“…New plant capacity additions in the NEM between 1998 and 2010 have totalled 5366 MW (ESAA, 2010). As evident in Simshauser (2010b)…”

“…New plant capacity additions in the NEM between 1998 and 2010 have totalled 5366 MW (ESAA, 2010). As evident in Simshauser (2010b), capacity additions between 1998 and 2002 were overwhelming new base load coal (2525 MW or 47 per cent), with peaking OCGT plant comprising the majority of the balance at 1633 MW (or 30 per cent). However, from 2005 onwards, gas plant represented 76 per cent of aggregate new investment, with only one coal plant, Kogan Creek, arriving in 2007 and no further coal investment proposals of note since.…”

“…Of course, if the plant was developed “on balance sheet”, then the project could internalise any losses in the broader corporate financial structure. But as noted in Simshauser (2010b), more than 80 per cent of the NEM’s privately owned generating plant capacity has been project financed, and under such structures, once a project’s cash flows fall below 1.35 times debt service costs in three successive quarters, the project will enter “financial lock‐up,” and if cash flows fall below 1.1 times debt service costs, the project will enter “outright default” (Simshauser, 2009). 19 Figure 2 provides a graphical illustration of the economics of a CCGT plant versus market prices in the absence of a carbon price 20…”

Environmental norms and electricity supply: an analysis of normative change and household solar PV in Australia

“…They were able to do this by drawing on the norms of reliability. Rising demand in the mid-2000s saw these companies (and their lawyers) able to convince courts and some high-profile economists (Simshauser 2010) that there was not enough incentive for them to build new coalfired sources of generation. Together, private generators and economic commentators exerted leverage over the federal and state governments' anxieties around reliability of supply to undermine the competition norm in practice.…”

From First Place to Last: The National Electricity Market's Policy-Induced ‘Energy Market Death Spiral’

“…Any new plant requires the involvement of an investment‐grade credit‐rated entity, either as principal investor or as the underwriter of long‐dated power purchase agreements—an entry barrier not envisaged by policy‐makers during market design phase had thus been applied by risk‐averse project finance banks (Simshauser ). This is not unique to Australia.…”