Coordinating Coal Plant Closures: Transient Strategic Reserves in Transitioning Energy-Only Markets

During 2016-2018, Australia’s National Electricity Market (NEM) experienced the adverse effects of two sequential and sudden coal plant closures, viz. sharply rising wholesale spot prices, structural hedge shortages and deteriorating system strength. More recently, a slowing rate of renewable project entry has led governments to intervene by delaying scheduled coal plant closures. An intervention to delay a scheduled coal plant closure helps maintain short term reliability but inadvertently undermines investor confidence in new entry through a transient depression in near-term forward prices. Above all, interventions risk reinforcing a cycle of stalled renewable entry and further delays to scheduled coal plant closures. This article analyses a transient strategic reserve, a deliberately temporary, out of market "waiting room" for dispatchable capacity to break the circularity. By assembling and temporarily underwriting a targeted reserve of dispatchable plant prior to coal closure dates, policymakers can maintain price stability and resource adequacy while substantially preserving the integrity of the energy only market design. Using a dynamic, security constrained electricity market model, outcomes across scenarios show the transient reserve produces a more orderly transition path, materially reduces the risk of price volatility and reliability breaches at relatively low cost, while improving investment incentives for intermittent renewables and dispatchable plant capacity. Findings suggest "the waiting room" is a tractable, low intrusion mechanism capable of supporting scheduled coal closures without institutionalising a capacity market.