A New Zealand Electricity Market Model: Assessment of the Effect of Climate Change on Electricity Production and Consumption
AbstractIn this paper, we introduce an electricity market model and use it to explore the effect of climate change on electricity output and prices. It is calibrated to the New Zealand Electricity Market, and includes multiple generation fuels, uncertain fuel availability, and storage options. The model is formulated in continuous time, which mimics the many short trading periods that are common to electricity spot markets, while properly incorporating forward-looking generation decision making. Specifically, it is used to estimate the effects of changes that may arise in characteristics of fuels -water and gas- as a consequence of climate change and climate change policies. The model does this under the polar cases of a competitive market structure and monopoly. There are three key findings from the results. First, the results illustrate the importance of allowing for volatility and including management of storage in electricity market models. Second, they suggest that reductions in average hydro fuel availability will reduce welfare significantly. Increases in the volatility of hydro fuel availability will also affect welfare, but to a very small extent. Third, the value of reservoir expansion is sensitive to the distribution of hydro fuel availability. Finally, the effects of a carbon tax are also reported.
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Bibliographic InfoPaper provided by Motu Economic and Public Policy Research in its series Working Papers with number 10_09.
Length: 13 pages
Date of creation: Sep 2010
Date of revision:
dynamic optimisation; electricity spot market performance; stochastic fuel availability; storage options; climate change;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- D9 - Microeconomics - - Intertemporal Choice
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
- NEP-ENE-2010-09-25 (Energy Economics)
- NEP-ENV-2010-09-25 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
- Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
- Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, 05.
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