The Entry Cost Shock and the Re-rating of Power Prices in New South Wales, Australia
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Australia has long been the beneficiary of low, stable power prices. A decade-long state of oversupply underpinned this result and while plant capital costs had been rising, the cost of capital had been declining. These offsetting effects locked the wholesale market into an average cost of $35-$40/MWh. However, from 2007, a simultaneous and sharp rise in new entrant plant capital costs and the cost of capital occurred. The combined effects crept up on the industry while it was in a state of oversupply. This 'entry cost shock' disrupted a 7 year long equilibrium price, with average power system cost rising to $60/MWh.
The Australian Economic Review
Author Posting. Copyright The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, 2010. Published by Blackwell Publishing Asia Pty Ltd. This is the author's version of the work. It is posted here by permission of The University of Melbourne, Melbourne Institute of Applied Economic and Social Research for personal use, not for redistribution. The definitive version was published in Australian Economic Review, Volume 43, Issue 2, pages 114–135, June 2010, http://dx.doi.org/10.1111/j.1467-8462.2010.00584.x