Fuel Price Caps in the Australian National Wholesale Electricity Market

Armin Pourkhanali (), Peyman Khezr, Rabindra Nepal and Tooraj Jamasb
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Armin Pourkhanali: School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, Australia, https://www.rmit.edu.au/contact/staff-contacts/academic-staff/p/pourkhanali-dr-armin

No 6-2023, Working Papers from Copenhagen Business School, Department of Economics

Abstract: Fuel price caps are one of the potential regulatory tools for controlling wholesale electricity prices when fuel prices are volatile. In this paper, we introduce a theoretical model to study the effects of such caps on firms’ bidding behavior and clearing prices in spot market auctions. We then use data from the Australian National Electricity Market (NEM), which recently implemented such caps, to empirically test and compare their effectiveness in three different states. Our theoretical findings suggest that fuel price caps can be binding, especially when electricity demand is lower and competition among generators is higher. When demand is high, alternative policy tools, such as market price caps, may be more effective in controlling auction prices. Our empirical analysis employs various techniques, such as Generalized Additive Models (GAM) and machine learning algorithms, to test the effectiveness of price caps in the NEM. We find mixed results regarding the effectiveness of fuel price caps in different states. Specifically, fuel price caps reduced wholesale electricity prices in Queensland and New South Wales, while they were not effective in controlling wholesale prices in Victoria.

Keywords: Electricity markets; Price caps; Fuel price (search for similar items in EconPapers)
JEL-codes: D40 L51 L94 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2023-09-13
New Economics Papers: this item is included in nep-ene and nep-reg
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Citations: View citations in EconPapers (1)

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