The National Electricity Market, a wholesale market covering Australia’s southern and eastern states, commenced operation in 1998. Though the market has long been considered a successful part of Australia’s energy market reforms, econometric analysis finds that coal generation closure in 2017 delivered an unexpected price shock in wholesale markets. Further analysis finds that average prices received by the coal-fired generators when coal generators set the clearing prices, more than doubled in the year after closure compared to the previous year. These increased spot market revenues collected by the coal generators by $3.47 billion from what they would have been if generator bids before closure had prevailed.
The authors propose a model of oligopolistic competition to explain the price outcomes. After examining the impact of higher coal prices and possible exogenous coal supply constraints, the authors conclude that the change in generator bids in the spot market is consistent with the optimal markup rule in our model. This paper finds that the entity that exercised the market power was able to increase its wholesale market profits by 60% and was able to substantially pass on wholesale price increases in the prices they charged their customers. The authors suggest this is typical of outcomes across the market, and thus the exercise of market power has had a large impact on consumers and producers, economic efficiency and the environment. The conclusions raise concerns about supply-side market concentration, and also about the design, operation and oversight of the wholesale market. This merits serious consideration not least in the context of future coal generation closure.