PROJECTS
Review of Vertical Integration between Generation and Retail in the Electricity Market, Australia
The problem
Major Australian electricity generators tend to be vertically integrated into electricity retail as a way of managing spot market risks. However, regulators increasingly believed that vertical integration may reduce competition by reducing liquidity in the contracts market and making it more difficult for new ‘pure-play’ retailers to enter the market. Origin Energy, one of the main market participants, were concerned that regulators would impose restrictions on vertical integration.
How we helped
Castalia showed that the standard measure of vertical integration used in Australia—comparing MWh of energy generated and MWh of energy retailed by each company—was misleading. Vertically integrated generator-retailers each owned a portfolio of generation plants which was not able to meet all its retail demands. Even if overall energy production appeared balanced with overall retail sales, no generator-retailers was in fact balanced on each of peak, shoulder and base-load. We empirically examined the link between vertical integration and contract market liquidity, demonstrating that there was no change in liquidity as a result of changes in measured vertical integration. Our analysis of international experience showed that the degree of vertical integration depended on risks and risk management opportunities created by different market design models, and that Australia’s market design could be expected to result in relatively high levels of vertical integration as an efficient response to risk.
Impact
Castalia report was submitted as part of a broad policy review, which in the end acknowledged that there was no justification for policy interventions to prevent vertical integration. However, debate about vertical integration in Australia continues with new proposals for compulsory divestment of some generation units by companies with large market share.
How can we help you?
How can we help you?
WASHINGTON, DC
+1 (202) 466-6790
1747 Pennsylvania Avenue NW, Suite 1200
United States of America
SYDNEY
+61 (2) 9231 6862
Suite 19.01, Level 19, 227 Elizabeth Street
Australia
AUCKLAND
+64 (4) 913 2800
Sinclair House, 3 Glenside Crescent
New Zealand
WELLINGTON
+64 (4) 913 2800
Level 2, 88 The Terrace
New Zealand
PARIS
+33 (0)1 85 64 10 22
3B Rue Taylor
France
BOGOTÁ
+57 (1) 508 5794
Calle 81 #11-08, Piso 5, Oficina 5-121
Colombia
Thinking for a better world.
WASHINGTON, DC
+1 (202) 466-6790
1747 Pennsylvania Avenue NW, Suite 1200
United States of America
SYDNEY
+61 (2) 9231 6862
Suite 19.01, Level 19, 227 Elizabeth Street
Australia
AUCKLAND
+64 (4) 913 2800
74D France Street, Newton South
New Zealand
WELLINGTON
+64 (4) 913 2800
Level 2, 88 The Terrace
New Zealand
PARIS
+33 (1) 73 44 26 97
6 Rue Duret
France
BOGOTÁ
+57 (1) 508 5794
Calle 81 #11-08, Piso 5, Oficina 5-127
Colombia
Thinking for a better world.