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

Abstract

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

Clean Energy, Australian Electricity Markets, and Information Transmission

“…Similarly, the spike during 2011-2013 indicates the flood situation in QLD (Bohensky & Leitch, 2014), which drastically affected the system's overall connectedness. The subsequent spike in connectedness indicates the carbon scheme during 2012-2014, which directed power generators to replace dirty energy with clean and renewable energy sources (Do et al, 2020). The spike during 2012-2014 was due to the sudden news of the proposed carbon policy, which generated high spillover and strong connectedness among the markets (Apergis et al, 2017).…”

“…Musa et al (2018) document that the world's oil and gas reserves will be depleted by the middle of this century, with coal reserves projected to be drained 60 years later. Transitioning from nonrenewables to renewables and clean energy sources has been a focus for the Australian Energy Market Operator (Do et al, 2020). Carbon policy is an attempt to achieve the goal of transitioning from fossil fuel to lower-carbon electricity production (Apergis et al, 2020).…”

Extremal Dependence in Australian Electricity Markets

“…Dynamic copula models are developed in Manner et al (2016Manner et al ( , 2019 to forecast the occurrence of spikes in multiple regional markets. Do et al (2020) conduct a higher moment interconnectedness analysis in the Australian NEM and suggest that the transmission of extreme price risk can be reduced by increasing transmission and generation capacity in the NEM.…”