News & insights
Date: October 2022 | Client: Australian Energy Council | Sector: Energy | Expertise: Regulation & competition
Price caps in the Australian National Energy Market (NEM)
Some commentators have suggested that the energy market price cap in Australia should be lowered upon the introduction of a capacity market, because otherwise generators would be compensated twice for the capacity they provide - once through the existing energy market, and again through the capacity market. This scenario has been termed “double-dipping”.
Our report for the Australian Energy Council (AEC) is focussed on the theme of 'double-dipping'. We were asked to consider whether a relatively high market price cap and other market settings, in the presence of a capacity mechanism, would result in double payment for capacity at unnecessary customer cost.
In our report, we:
- provide a brief overview of capacity markets and energy only markets in order to contextualise the discussion;
- provide a detailed discussion of the theory of whether generators would be expected to double-dip upon the introduction of the capacity market in addition to the NEM’s existing energy market;
- discuss and analyse key assumptions relating to this theory; and
- provide real-life evidence of the theory in practice in other contexts.
Our team of energy sector experts was also engaged to develop a simple model to aid the demonstration of the theory; and comment on how to develop a more complex model which more accurately reflects the real conditions of the NEM. The findings of CEPA's work are that:
- offers are based on net marginal costs meaning that double dipping should not occur;
- with all else equal, changing the market price cap should have no impact on physical or financial outcomes;
- low market price caps drive the need for capacity markets, not the other way around; and
- lowering the market price cap for other reasons may be appropriate but comes with trade-offs.
Our full report has been published by the AEC and is available to download from their website.
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