Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets

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Simshauser, P
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2021
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http://creativecommons.org/licenses/by-nc-nd/4.0/
Abstract

Resource adequacy in energy-only markets is of continual interest to policymakers and in Australia has historically been navigated via energy retailer investment commitments in peaking plant capacity. This in turn has been driven by the National Electricity Market's very high Market Price Cap (AUD $15,000/MWh). The market is rapidly transitioning with rising levels of renewables and coal plant closures. Ironically however, investment commitments in peaking plant capacity by major energy retailers has stalled. This raises the question as to whether the model of vertical integration, a pattern which dominated energy-only markets, has somehow broken down. In this article, peaking plant dynamics are tested using historic data – first as a stand-alone generator, then as part of a merged vertical entity over 16 years of trade. Results reveal the canonical merchant peaking plant remains too risky as a stand-alone project financing, but vertical integration and energy retailer incentives to commit to on-balance sheet peaking plant remains strong, with transaction cost synergies of 13% and investment grade credit quality being contingent on integration. Any lack of commitment must be explained by other variables.

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Energy Economics
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© 2021 Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence (http://creativecommons.org/licenses/by-nc-nd/4.0/) which permits unrestricted, non-commercial use, distribution and reproduction in any medium, providing that the work is properly cited.
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Electrical engineering
Heterodox economics
Applied economics
Mechanical engineering
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Simshauser, P, Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets, Energy Economics, 2021, 104, pp. 105612
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