How do changes in settlement periods affect wholesale market prices? Evidence from Australia's National Electricity Market

We examine whether a major change in wholesale electricity market price settlement rules in Australia's National Electricity Market (NEM) has resulted in lower electricity prices, potentially benefiting consumers. In October 2021, the NEM transitioned from a 30-min average to a 5-min single period settlement price. We develop a theoretical framework for multiple firms spanning two periods, comparing averaged versus single-period bidding systems. Our findings indicate that strategic bidding behaviour often leads to elevated clearing prices under averaged settlement rules. We support our theoretical findings by empirically analysing the short-term effects of the rule change in the NEM from 1 October 2021 to 31 December 2021. Our analysis reveals that electricity prices were up to 4.9% lower than they would have been without the rule adjustment.