Nonlinear impacts of distributed generation on extreme electricity prices under policy shocks: Evidence from New Zealand's oil and gas exploration ban

This study investigates the asymmetric impact of Distributed Generation (DG) penetration on extreme wholesale electricity price movements in New Zealand, using the 2018 oil and gas exploration ban as a structural policy shock. By integrating benchmark fixed effects and System-GMM estimations with a Quantile Autoregressive Distributed Lag (QARDL) model, we explore how DG influences both lower-tail (ED) and upper-tail (EI) price volatility before and after the ban. Empirical results reveal that prior to the ban, higher DG penetration was significantly associated with a reduction in EI and a modest elevation in ED in the short run, helping stabilize the system by smoothing marginal price risks. However, in the long run, oversupply effects—particularly from solar—led to a rise in the frequency of ED events, suggesting unintended downward pressure during low-demand periods. After the ban, DG's regulatory role shifted: in the ED regime, DG deepened low-price suppression and volatility, while in the EI regime, it failed to mitigate upward price pressures due to fossil fuel constraints and reduced system flexibility. The system stability coefficient ρ from the QARDL-ECM specification indicates slower price mean-reversion post-ban, highlighting increased market fragility. These findings suggest that DG's effect on market stability is not static but highly state-dependent and shaped by policy context. While DG can contribute to long-term price smoothing, its short-term stabilizing capacity weakens under supply shocks and institutional constraints. To enhance system resilience, policymakers must complement DG expansion with investment in energy storage, demand-side flexibility, and diversified generation sources. Without these, DG alone may amplify rather than mitigate extreme price risks under transition pressures.