The Emergence of Structural Faults on the Supply Side in Deregulated ‘Energy Only’ Electricity Markets

This article examines the effect of plant entry and exit in a deregulated ‘energy only’ electricity market. A partial equilibrium framework is presented that determines the optimal portfolio of base, intermediate and peaking plant for a given electricity load curve. An optimal result for Queensland is compared against the actual plant stock. Analysis of the portfolio indicates that deregulation is failing a key objective, namely enhancing dynamic efficiency, because too much base plant has been delivered. The research presents scenarios of structural corrections, using the theory of the generalised war of attrition to develop the cases. Results from simulation experiments are clear—consumers will secure lower electricity prices in the short run. But oversupply of base plant may suppress prices to such an extent that they fail to signal timely entry of peaking plant—the consequence of this failure being eventual price shocks and, potentially, load shedding.