Vertical integration, credit ratings and retail prices settings in energy-only markets: navigating the Resource Adequacy problem”, Energy Policy

Energy-only markets are prone to the Resource Adequacy problem, i.e. the timely entry of new plant. The reason for this is that competitive energy-only markets struggle to be remunerative given reliability constraints and market price caps. Historically, Australia’s 45,000MW National Electricity Market has managed to navigate this well understood problem, albeit with government entities directly or indirectly responsible for a surprisingly large 73 % of all new plant investments to 2007. But government involvement in direct investment has now ceased. So what will enable the industry to navigate the Resource Adequacy problem into the future? Quite simply, industrial organisation, the presence of firms with investment-grade credit ratings and setting any regulated retail prices or ‘price to beat ’ with an LRMC floor