Impacts of LNG Export and Market Power on Australian Electricity Market Dynamics, 2016–2019

PURPOSE OF REVIEW: Supply-side shocks in concentrated energy markets provide opportunity for exercise of market power, especially in markets undergoing transition due to imperatives such as decarbonisation. In Australia, the recent linkage of international gas markets with the electricity market provides a useful example to review these dynamics. RECENT FINDINGS: Using the intersections between gas and electricity markets in Australia, we explore how (1) supply constraints associated with commencement of Liquefied Natural Gas (LNG) exports, and (2) market concentration due to closure of old coal plant, contributed to effect a doubling of wholesale electricity prices. The recent Australian experience highlights the disproportionate impact of gas generation on electricity prices due to its price-setting role. The price impact of the tightened gas market on electricity prices has been significantly exacerbated through the exercise of market power, especially via the practise of ‘shadow pricing’. In the Australian case, the potential adverse intersectional impacts of LNG exports could have been substantially adverted with enforced domestic reservation of about 6% of LNG export volumes. SUMMARY: Competition issues and gaming opportunities, which have accompanied the increased market concentration that accompanied the withdrawal of capacity, have exacerbated the price impacts of the supply-side shock stemming from the evolving gas market.