A note on price volatility in the Australian electricity market

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. References Australian Bureau of Statistics: Year Book Australia, Energy: Special Article---Reforms in the Australian Electricity and Gas Industries, http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/C50CABC70C99E249CA2569E3001FF8A5?OpenDocument A. Kay-Spratley, A. Worthington and H. Higgs, Transmission of price and price volatility in australian electricity spot market: a multivariance garch analysis. Energy Economics, 27:337(350), 2005. doi:10.1016/j.eneco.2003.11.002 An introduction to Australia's National Electricity Market, July 2009, http://www.aemo.com.au/corporate/0000-0262.pdf D. Brennan and J. Melanie, Market power in the autralian power market, Energy Economics, 20:121(133), 1998. doi:10.1016/S0140-9883(97)00010-8 M. Goto and G. Karolyi, Understanding Electricity Price Volatility within and across Markets, Working Paper Series 2004-12,2004. http://econpapers.repec.org/RePEc:ecl:ohidic:2004-12 H. Higgs, Price and volatility relationships in the Australian electricity market, PhD Thesis, submitted 2006, Queensland University of Technology. http://eprints.qut.edu.au/16404/ D. P. Kothari and I. J. Nagrath, Modern Power System Analysis, McGraw-Hill, 2008. ISBN 978-0-07-340455-4 F. Longstaff and A. Wang, Electricity Forward Prices: A High-Frequency Empirical Analysis, Journal of Finance, Vol. 59(4) Aug. 2004, pp.1877--1900. doi:10.1111/j.1540-6261.2004.00682.x H. Outhred, The competitive market for electricity in Australia: why it works so well, Proceedings of the 13rd International Conference on System Sciences, 2000. doi:10.1109/HICSS.2000.926760 S. Stoft, Power System Economics, John Wiley, New York, NY, 2002. http://au.wiley.com/WileyCDA/WileyTitle/productCd-0471150401.html F. A. Wolak, An empirical analysis of the impact of hedge contracts on bidding behavior in a competitive electricity market, Stanford University, 1999. doi:10.1080/1016873000000001