100 % Renewables in Australia Will a Capacity Market be Required ?

Efficient wholesale markets should drive preference revealing bidding where generators offer the majority of their power at 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. This has led to suggestions that a capacity market may be required in the Australian National Electricity Market (NEM). This analysis suggests that existing energy-only market mechanisms in the NEM have the potential to operate effectively in a 100% renewables scenario, but success will rely upon two critical factors: (1) further increase to the already high Market Price Cap (MPC) of $12,900/MWh. Initial analysis suggests this may need to increase by a factor of six to eight. 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 MPC. (2) A liquid and well-functioning derivative contracts market, to allow generators and retailers to hedge significant market risks successfully. Observed trends towards vertical integration and market power in retail markets may be reducing derivative market liquidity. Additional transparency measures may be required to facilitate improved monitoring, and intervention may ultimately be required to ensure continued derivative market liquidity. Keywords-Capacity market, energy-only market, National Electricity Market, NEM, Australia