Be Wary of Paying Wounded Bulls – Capacity Markets in Australia's National Electricity Market*

Australia's Energy Security Board is currently considering whether to pivot the east-coast Australian National Electricity Market from an energy-only market to include some form of capacity remuneration. This discussion is occurring during an unprecedented energy crisis where the wholesale market was suspended following a 275% increase in underlying wholesale energy prices. This article unpacks the root causes of the current energy crisis and how a traditional capacity market would have been ineffective in addressing it. We find that a traditional capacity market may provide windfall gains to wounded bull coal generators and be counterproductive in driving new investment in dispatchable technologies. Our recommendation is that policy-makers should focus on utilising existing regulatory tools and a capacity reserve to insure against the unanticipated failures of ageing coal plants.