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Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets

Paul Simshauser ()

Energy Economics, 2021, vol. 104, issue C

Abstract: Resource adequacy in energy-only markets is of continual interest to policymakers and in Australia has historically been navigated via energy retailer investment commitments in peaking plant capacity. This in turn has been driven by the National Electricity Market's very high Market Price Cap (AUD $15,000/MWh). The market is rapidly transitioning with rising levels of renewables and coal plant closures. Ironically however, investment commitments in peaking plant capacity by major energy retailers has stalled. This raises the question as to whether the model of vertical integration, a pattern which dominated energy-only markets, has somehow broken down. In this article, peaking plant dynamics are tested using historic data – first as a stand-alone generator, then as part of a merged vertical entity over 16 years of trade. Results reveal the canonical merchant peaking plant remains too risky as a stand-alone project financing, but vertical integration and energy retailer incentives to commit to on-balance sheet peaking plant remains strong, with transaction cost synergies of 13% and investment grade credit quality being contingent on integration. Any lack of commitment must be explained by other variables.

Keywords: Energy markets; Resource adequacy; Project finance; Peaking plant; Vertical integration; Transaction costs (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:104:y:2021:i:c:s0140988321004783

DOI: 10.1016/j.eneco.2021.105612

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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