Be Wary of Paying Wounded Bulls – Capacity Markets in Australia's National Electricity Market

Tim Nelson, Joel Gilmore and Tahlia Nolan

Economic Papers, 2023, vol. 42, issue 1, 72-91

Abstract: Australia's Energy Security Board is currently considering whether to pivot the east‐coast Australian National Electricity Market from an energy‐only market to include some form of capacity remuneration. This discussion is occurring during an unprecedented energy crisis where the wholesale market was suspended following a 275% increase in underlying wholesale energy prices. This article unpacks the root causes of the current energy crisis and how a traditional capacity market would have been ineffective in addressing it. We find that a traditional capacity market may provide windfall gains to wounded bull coal generators and be counterproductive in driving new investment in dispatchable technologies. Our recommendation is that policy‐makers should focus on utilising existing regulatory tools and a capacity reserve to insure against the unanticipated failures of ageing coal plants.

Date: 2023
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