Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 6-2023: Fuel Price Caps in the Australian National Wholesale Electricity Market

Armin Pourkhanali (), Peyman Khezr (), Rabindra Nepal () and Tooraj Jamasb ()
Additional contact information
Armin Pourkhanali: School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, Australia
Peyman Khezr: School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology, Australia
Rabindra Nepal: Faculty of Business and Law, School of Business, University of Wollongong, Australia
Tooraj Jamasb: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1. floor, DK-2000 Frederiksberg, Denmark

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.

Keywords: Electricity markets; Price caps; Fuel price

JEL-codes: D40; L51; L94

Language: English

30 pages, September 13, 2023

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