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Interconnectedness in the Australian National Electricity Market: A Higher‐Moment Analysis

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  • Hung Do
  • Rabindra Nepal
  • Russell Smyth

Abstract

We examine the risk transmission mechanisms in the interconnected Australian National Electricity Market (NEM). We illustrate that the transmission of extreme events should be considered in terms of their magnitude (via skewness) and the likelihood of their occurrence (via kurtosis) when promoting NEM interconnectedness. Our empirical findings suggest that interconnectedness costs can be limited by providing sufficient transmission capacity as it can expand generation capacity. Our results suggest that a 1 per cent increase in NEM generation capacity can decrease the transmission of these risks by between 0.9 and 1.7 per cent, depending on the moment of the electricity return distribution.

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  • Hung Do & Rabindra Nepal & Russell Smyth, 2020. "Interconnectedness in the Australian National Electricity Market: A Higher‐Moment Analysis," The Economic Record, The Economic Society of Australia, vol. 96(315), pages 450-469, December.
    • Handle: RePEc:bla:ecorec:v:96:y:2020:i:315:p:450-469
    DOI: 10.1111/1475-4932.12563
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    2. Naeem, Muhammad Abubakr & Karim, Sitara & Rabbani, Mustafa Raza & Nepal, Rabindra & Uddin, Gazi Salah, 2022. "Market integration in the Australian National Electricity Market: Fresh evidence from asymmetric time-frequency connectedness," Energy Economics, Elsevier, vol. 112(C).
    3. Hung Xuan Do & Rabindra Nepal & Son Duy Pham & Tooraj Jamasb, 2023. "Electricity Market Crisis in Europe and Cross Border Price Effects: A Quantile Return Connectedness Analysis," CAMA Working Papers 2023-46, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    5. Lin Han & Ivor Cribben & Stefan Trueck, 2022. "Extremal Dependence in Australian Electricity Markets," Papers 2202.09970, arXiv.org.
    6. Apergis, Nicholas & Pan, Wei-Fong & Reade, James & Wang, Shixuan, 2023. "Modelling Australian electricity prices using indicator saturation," Energy Economics, Elsevier, vol. 120(C).

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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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