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A New Zealand Electricity Market Model: Assessment of the Effect of Climate Change on Electricity Production and Consumption

Author

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  • Lewis Evans

    () (Victoria University Of Wellington)

  • Greame Guthrie

    () (Victoria University of Wellington)

  • Andrea Lu

Abstract

In 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.

Suggested Citation

  • Lewis Evans & Greame Guthrie & Andrea Lu, 2010. "A New Zealand Electricity Market Model: Assessment of the Effect of Climate Change on Electricity Production and Consumption," Working Papers 10_09, Motu Economic and Public Policy Research.
  • Handle: RePEc:mtu:wpaper:10_09
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    References listed on IDEAS

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    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    2. Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
    3. Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, May.
    4. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
    5. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    6. Miguel A. Espinosa & Alvaro J. Riascos Villegas, 2010. "Strategic Behaviour, Resource Valuation and Competition in Electricity Markets," DOCUMENTOS CEDE 006856, UNIVERSIDAD DE LOS ANDES-CEDE.
    7. Lyle, Matthew R. & Elliott, Robert J., 2009. "A 'simple' hybrid model for power derivatives," Energy Economics, Elsevier, vol. 31(5), pages 757-767, September.
    8. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
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    Cited by:

    1. Lewis Evans & Seamus Hogan & Peter Jackson, 2012. "A critique of Wolak's evaluation of the NZ electricity market: Afterword," New Zealand Economic Papers, Taylor & Francis Journals, vol. 46(1), pages 51-52, December.
    2. Lewis Evans & Seamus Hogan & Peter Jackson, 2012. "A critique of Wolak's evaluation of the NZ electricity market: Introduction and overview," New Zealand Economic Papers, Taylor & Francis Journals, vol. 46(1), pages 1-10, November.
    3. de Braganca, Gabriel Fiuza & Daglish, Toby, 2012. "Can market power in the electricity spot market translate into market power in the hedge market?," Working Paper Series 4130, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

    More about this item

    Keywords

    dynamic optimisation; electricity spot market performance; stochastic fuel availability; storage options; climate change;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • 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

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