A note on price volatility in the Australian electricity market

Abstract

Efficiency in electricity transmission has been a worldwide 'hot topic' for more than ten years and has led to reforms in many countries. However, the performance of the restructured electricity markets is often questioned since it depends, to a large extent, on the way market participants collectively respond to market rules and procedures. We examine data from Australia's National Electricity Market with emphasis on variability in spot prices. These data indicate that the structure of electricity generators' bidding offers may be one of the important contributors to the volatility in electricity prices. A scheme for reducing the volatility of spot prices is then proposed in the form of new regulations on the structure of generators' electricity price and volume bids.