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Fuel Price Caps in the Australian National Wholesale Electricity Market

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  • Pourkhanali, Armin

    (School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, Australia)

  • Khezr, Peyman

    (School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, Australia)

  • Nepal, Rabindra

    (Faculty of Business and Law, School of Business, University of Wollongong, Australia)

  • Jamasb, Tooraj

    (Department of Economics, Copenhagen Business School)

Abstract

Fuel price caps are one of the potential regulatory tools for controlling wholesale electricity prices when fuel prices are volatile. In this paper, we introduce a theoretical model to study the effects of such caps on firms’ bidding behavior and clearing prices in spot market auctions. We then use data from the Australian National Electricity Market (NEM), which recently implemented such caps, to empirically test and compare their effectiveness in three different states. Our theoretical findings suggest that fuel price caps can be binding, especially when electricity demand is lower and competition among generators is higher. When demand is high, alternative policy tools, such as market price caps, may be more effective in controlling auction prices. Our empirical analysis employs various techniques, such as Generalized Additive Models (GAM) and machine learning algorithms, to test the effectiveness of price caps in the NEM. We find mixed results regarding the effectiveness of fuel price caps in different states. Specifically, fuel price caps reduced wholesale electricity prices in Queensland and New South Wales, while they were not effective in controlling wholesale prices in Victoria.

Suggested Citation

  • Pourkhanali, Armin & Khezr, Peyman & Nepal, Rabindra & Jamasb, Tooraj, 2023. "Fuel Price Caps in the Australian National Wholesale Electricity Market," Working Papers 6-2023, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2023_006
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    References listed on IDEAS

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    1. Natalia Fabra & Nils‐Henrik Fehr & David Harbord, 2006. "Designing electricity auctions," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 23-46, March.
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    3. Peyman Khezr & Anne Cumpston, 2022. "A review of multiunit auctions with homogeneous goods," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 1225-1247, September.
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    7. Takuji Matsumoto & Derek Bunn & Yuji Yamada, 2022. "Pricing electricity day-ahead cap futures with multifactor skew-t densities," Quantitative Finance, Taylor & Francis Journals, vol. 22(5), pages 835-860, May.
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    Cited by:

    1. Csereklyei, Zsuzsanna & Khezr, Peyman, 2024. "How do changes in settlement periods affect wholesale market prices? Evidence from Australia's National Electricity Market," Energy Economics, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    Electricity markets; Price caps; Fuel price;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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