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The Entry Cost Shock and the Re‐rating of Power Prices in New South Wales, Australia

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  • Paul Simshauser
  • Elizabeth Molyneux
  • Michelle Shepherd

Abstract

Australia has long been the beneficiary of low, stable power prices. A decade‐long state of oversupply underpinned this result and while plant capital costs had been rising, the cost of capital had been declining. These offsetting effects locked the wholesale market into an average cost of $35–$40/MWh. However, from 2007, a simultaneous and sharp rise in new entrant plant capital costs and the cost of capital occurred. The combined effects crept up on the industry while it was in a state of oversupply. This ‘entry cost shock’ disrupted a 7 year long equilibrium price, with average power system cost rising to $60/MWh.

Suggested Citation

  • 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, June.
    • Handle: RePEc:bla:ausecr:v:43:y:2010:i:2:p:114-135
    DOI: 10.1111/j.1467-8462.2010.00584.x
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    References listed on IDEAS

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    1. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
    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. 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.
    4. Simshauser, Paul, 2009. "On Emissions Trading, Toxic Debt and the Australian Power Market," The Electricity Journal, Elsevier, vol. 22(2), pages 9-29, March.
    5. Paul Simshauser & Phillip Wild, 2009. "The Western Australian Power Dilemma," Australian Economic Papers, Wiley Blackwell, vol. 48(4), pages 342-369, December.
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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. 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.
    3. 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.
    4. Laurie Buys & Desley Vine & Gerard Ledwich & John Bell & Kerrie Mengersen & Peter Morris & Jim Lewis, 2015. "A Framework for Understanding and Generating Integrated Solutions for Residential Peak Energy Demand," PLOS ONE, Public Library of Science, vol. 10(3), pages 1-20, March.
    5. 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.
    6. Simshauser, Paul, 2018. "On intermittent renewable generation & the stability of Australia's National Electricity Market," Energy Economics, Elsevier, vol. 72(C), pages 1-19.
    7. 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.
    8. Tim Nelson & Simon Kelley & Fiona Orton & Paul Simshauser, 2010. "Delayed Carbon Policy Certainty and Electricity Prices in Australia," Economic Papers, The Economic Society of Australia, vol. 29(4), pages 446-465, December.

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