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On the viability of energy-capacity markets under decreasing marginal costs

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  • Khezr, Peyman
  • Nepal, Rabindra

Abstract

This study analyses markets for wholesale electricity that implement uniform-price auctions. We study a model with marginal cost-based regulatory pricing framework where the marginal cost of electricity generation is decreasing. The energy-capacity wholesale electricity market of Western Australia (WEM) is analysed for this purpose. Wholesale markets globally like the WEM need to remunerate electricity generators for the recovery of missing money in electricity generation to ensure resource adequacy as wholesale electricity prices further continue to decline. We show that marginal cost-based price regulation under decreasing marginal cost forces electricity generators to shut down as power producers cannot make a positive profit. The switch to average variable cost-based regulation also induces negative profit for electricity generators in some cases. We recommend that a market regulation under a uniform-price auction arrangement should include price caps to mitigate the high prices and volatility. In the long-term, the return to an energy-only market is a viable possibility.

Suggested Citation

  • Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:eneeco:v:96:y:2021:i:c:s0140988321000621
    DOI: 10.1016/j.eneco.2021.105157
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    References listed on IDEAS

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    Cited by:

    1. Armin Pourkhanali & Peyman Khezr & Rabindra Nepal & Tooraj Jamasb, 2023. "Fuel Price Caps in the Australian National Wholesale Electricity Market," CAMA Working Papers 2023-39, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Sirin, Selahattin Murat & Erten, Ibrahim, 2022. "Price spikes, temporary price caps, and welfare effects of regulatory interventions on wholesale electricity markets," Energy Policy, Elsevier, vol. 163(C).
    3. Jia, Zhijie & Lin, Boqiang, 2023. "Primary fossil energy cost and price regulation in energy processing sectors---the perspective of price regulation market with Chinese characteristics," Resources Policy, Elsevier, vol. 83(C).
    4. S. Oliveira, Fernando & William-Rioux, Bertrand & Pierru, Axel, 2023. "Capacity expansion in liberalized electricity markets with locational pricing and renewable energy investments," Energy Economics, Elsevier, vol. 127(PB).
    5. Sirin, Selahattin Murat & Camadan, Ercument & Erten, Ibrahim Etem & Zhang, Alex Hongliang, 2023. "Market failure or politics? Understanding the motives behind regulatory actions to address surging electricity prices," Energy Policy, Elsevier, vol. 180(C).
    6. Simshauser, Paul, 2021. "Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets," Energy Economics, Elsevier, vol. 104(C).

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