Australian evidence on the role of interregional flows, production capacity, and generation mix in wholesale electricity prices and price volatility

This paper examines the impact of interregional flows, production capacity and generation mix, encompassing both fossil fuels (black and brown coal and natural gas) and renewables (hydropower and wind power), on daily wholesale electricity price volatility across the five regional electricity markets in the Australian National Electricity Market from January 2006 to June 2012. One objective is to examine the volatility impacts of daily interregional energy flows when regions are exporting and importing electricity and daily slack (excess daily capacity) produced by differences in generation capacity and actual generation. Another is to gain insights into the emergent effects of policy and industry developments regarding the choice of generation on price volatility. Using Student panel common and fixed-effects generalized autoregressive conditional heteroscedasticity (GARCH) specifications, we find that the type of generation exerts a strong influence on prices and price volatility, with prices increasing for open-cycle gas turbine and hydro generation and decreasing for black coal generation. We also find increasing price volatility for black coal, open-cycle gas turbine, and hydro generation, and decreasing price volatility for combined-cycle gas turbine generation. Interregional flows appear to exert no significant influence on prices or price volatility, while generation slack tends to reduce prices, but has no effect on price volatility.