Fuel Price Caps in the Australian National Wholesale Electricity Market

Fuel price caps are one of the potential regulatory tools for controlling wholesale electricity prices when
fuel prices are volatile. In this paper, we introduce a theoretical model to study the effects of such caps
on firms’ bidding behavior and clearing prices in spot market auctions. We then use data from the
Australian National Electricity Market (NEM), which recently implemented such caps, to empirically test
and compare their effectiveness in three different states. Our theoretical findings suggest that fuel price
caps can be binding, especially when electricity demand is lower and competition among generators is
higher. When demand is high, alternative policy tools, such as market price caps, may be more effective
in controlling auction prices. Our empirical analysis employs various techniques, such as Generalized
Additive Models (GAM) and machine learning algorithms, to test the effectiveness of price caps in the
NEM. We find mixed results regarding the effectiveness of fuel price caps in different states. Specifically,
fuel price caps reduced wholesale electricity prices in Queensland and New South Wales, while they were
not effective in controlling wholesale prices in Victoria.