 Crises in Texas and Australia: Failures of energy-only markets or unforeseen consequences of price caps?Darryl R. Biggar and Mohammad Reza Hesamzadeh Energy Economics, 2024, vol. 137, issue C Abstract: The Australian National Electricity Market (NEM) and the Texas wholesale electricity market (ERCOT) are two of the most prominent examples of energy-only wholesale electricity markets in the world. In early 2021 and mid 2022 these markets suffered from unprecedented crises, prompting some commentators to question the energy-only market design. Both markets are now considering implementing a form of capacity mechanism. Are these crises evidence of a fundamental flaw in the energy-only market design, or something else? We argue that, although the crises were very different in form, both crises arose in part from the effect of price caps in the wholesale market. We set out a model of the optimal mix of generation technologies in a framework in which generators can invest to protect against extreme weather events. We show that a price cap (below VoLL) reduces incentives for investment in hardening generation. Rather than further lowering the price caps – as was done in Texas – we propose a range of reforms to strengthen and enhance the confidence in the wholesale market. Keywords: Electricity market; Crisis (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:137:y:2024:i:c:s0140988324005188 DOI: 10.1016/j.eneco.2024.107810 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
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