Markets with Power: Competitive benchmark model of the Australian National Electricity Market

In the late 2010s, a confluence of events contributed to unprecedented price increases and volatility in the Australian National Electricity Market (NEM). We investigate to what extent market power contributed to elevated prices during this time. We base our analysis on a benchmark model of the NEM, which estimates counterfactual prices under the assumption of perfect competition. We construct marginal cost curves for each interval based on unit characteristics and fuel prices and produce a counterfactual competitive timeseries using actual demand. A comparison of actual market outcomes with our benchmark simulations suggests that, on average, a material fraction of regional prices are a result of market power. Depending on the region and time period, market power can account for 10% to 50% of wholesale prices. Moreover, our analysis indicates that market power tends to be most prevalent within the Queensland region and during high levels of regional demand across the NEM.