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The Dynamic Efficiency Gains from Introducing Capacity Payments in the National Electricity Market

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  • Paul Simshauser

Abstract

"Australia's National Electricity Market (NEM) has been a beacon for governments around the world considering power industry reform. However, while the energy-only NEM has served Australia well since 1998, deep structural supply-side faults exist. Competitive energy-only markets do not have a stable equilibrium solution unless reliability constraints are violated, market power is exercised, or scarcity pricing operates unabated. But the political economy of electricity means none of this is likely. This research finds that by reducing the NEM price cap and introducing a 'capacity payments pool', a tractable and politically acceptable equilibrium can be established to facilitate timely plant entry." Copyright (c)2008 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.

Suggested Citation

  • Paul Simshauser, 2008. "The Dynamic Efficiency Gains from Introducing Capacity Payments in the National Electricity Market," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 41(4), pages 349-370, December.
  • Handle: RePEc:bla:ausecr:v:41:y:2008:i:4:p:349-370
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    References listed on IDEAS

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    1. Simshauser, Paul, 2001. "Excess Entry in the Deregulated Queensland Power Market," Economic Analysis and Policy, Elsevier, vol. 31(1), pages 73-92, March.
    2. Anderson, Edward J. & Hu, Xinin & Winchester, Donald, 2007. "Forward contracts in electricity markets: The Australian experience," Energy Policy, Elsevier, vol. 35(5), pages 3089-3103, May.
    3. Brennan, Donna & Melanie, Jane, 1998. "Market power in the Australian power market," Energy Economics, Elsevier, vol. 20(2), pages 121-133, April.
    4. John Foster & Melvin J. Hinich & Phillip Wild, 2008. "Randomly Modulated Periodic Signals in Australias National Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 105-130.
    5. Alan Moran, 2008. "The emergence of Australia's electricity market," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 29(1/2), pages 88-108.
    6. Paul Simshauser, 2006. "The Emergence of Structural Faults on the Supply Side in Deregulated 'Energy Only' Electricity Markets," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 39(2), pages 130-146, June.
    7. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    8. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
    9. Roques Fabien A. & Newbery David M. & Nuttall William J., 2005. "Investment Incentives and Electricity Market Design: the British Experience," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-36, June.
    10. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-216, June.
    11. Bushnell, James, 2005. "Electricity Resource Adequacy: Matching Policies and Goals," The Electricity Journal, Elsevier, vol. 18(8), pages 11-21, October.
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    Citations

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    Cited by:

    1. Nelson, James & Simshauser, Paul, 2013. "Is the Merchant Power Producer a broken model?☆☆The views expressed in this paper are those of the authors and any errors or omissions remain the responsibility of the authors," Energy Policy, Elsevier, vol. 53(C), pages 298-310.
    2. Paul Simshauser, 2011. "The Hidden Costs of Wind Generation in a Thermal Power System: What Cost?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 44(3), pages 269-292, September.
    3. Simshauser, P, 2018. "Missing money, missing policy and Resource Adequacy in Australia’s National Electricity Market," Cambridge Working Papers in Economics 1840, Faculty of Economics, University of Cambridge.
    4. Richard Meade & Seini O’Connor, 2011. "Comparison of Long-term Contracts and Vertical Integration in Decentralized Electricity Markets," Chapters,in: Competition, Contracts and Electricity Markets, chapter 4 Edward Elgar Publishing.
    5. repec:eee:eneeco:v:72:y:2018:i:c:p:1-19 is not listed on IDEAS
    6. Simshauser, Paul & Tian, Yuan & Whish-Wilson, Patrick, 2015. "Vertical integration in energy-only electricity markets," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 35-56.
    7. Simshauser, Paul, 2010. "Vertical integration, credit ratings and retail price settings in energy-only markets: Navigating the Resource Adequacy problem," Energy Policy, Elsevier, vol. 38(11), pages 7427-7441, November.
    8. Simshauser, Paul & Nelson, Tim & Doan, Thao, 0. "The Boomerang Paradox, Part I: How a Nation's Wealth Is Creating Fuel Poverty," The Electricity Journal, Elsevier, vol. 24(1), pages 72-91, January.
    9. Paul Simshauser & Elizabeth Molyneux & Michelle Shepherd, 2010. "The Entry Cost Shock and the Re-rating of Power Prices in New South Wales, Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 43(2), pages 114-135.
    10. Nelson, Tim & Reid, Cameron & McNeill, Judith, 2015. "Energy-only markets and renewable energy targets: Complementary policy or policy collision?," Economic Analysis and Policy, Elsevier, vol. 46(C), pages 25-42.

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