Market Power and Generation from Renewables: the Case of Wind in the South Australian Electricity Market

This paper examines whether outcomes in the electricity market in South Australia are consistent with theoretical analysis and market modelling that concluded that intermittent generation benefits less from market power than conventional generation. The paper finds that, based on actual outcomes in South Australia over the period from 2006 to 2011, the exercise of market power is likely to result in a preference for investment in conventional fossil fuel based electricity generation, relative to investment in wind farms. It also concludes that while wind farms have taken market share from conventional generators, wind farms are not likely to have reduced spot prices in South Australia to the extent that seems apparent in electricity markets in other countries where wind farms are as prevalent but market power is less significant. The implication of these conclusions is that higher subsidies will be needed to ensure that the Australian Government's renewable electricity targets will be met, than would be the case if the exercise of market power did not have these distributional effects. The paper suggests consideration of changes to market design and competition law to remedy this.