Econonomics of Energy and Environmental Policy

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Assessing the viability of Energy-Only Markets with 100% Renewables

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Abstract - Efficient wholesale electricity markets should drive preference revealing bidding where generators offer the majority of their power at their short run marginal cost (SRMC). However, most renewables have very low SRMCs, which in a competitive market is likely to lead to an increasing proportion of low priced periods. Combined with concerns around the variable availability of some renewable generation types, this has led to suggestions that energy-only markets may need to be augmented with capacity remuneration mechanisms as their renewable penetration grows. This analysis explores the operation of energy-only markets with high renewables, with a case study of the Australian National Electricity Market (NEM). Results suggest that existing energy-only market mechanisms have the potential to operate effectively in a 100% renewables scenario, but success will rely upon two critical factors. Firstly, an increase in the Market Price Cap is likely to be required. Preliminary analysis suggests this may need to increase from the present $13,500/ MWh in the NEM to the range $60,000 to $80,000 /MWh. Alternatively, comprehensive demand side participation could allow each customer to select their preferred level of reliability and associated cost, removing the need for an administratively determined Market Price Cap. Secondly, a liquid and well-functioning derivative contracts market will be required to allow generators and retailers to hedge increased market risks successfully.
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JEL Codes:L51: Economics of Regulation, L94: Electric Utilities, Q41: Energy: Demand and Supply; Prices

Keywords: Capacity market, energy-only market, National Electricity Market, NEM, Australia, renewables, resource adequacy, system adequacy

DOI: 10.5547/2160-5890.5.1.jrie

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Published in Volume 5, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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