Price and Volatility Spillovers in Australian electricity markets
thesisposted on 28.03.2022, 02:48 authored by Lin Han
Electricity markets are significantly more volatile than other comparable financial or commodity markets. Extreme price outcomes, typically referred to as price spikes, as well as periods of substantial price volatility and their transmission between interconnected regional markets pose significant risks for market participants. This study investigates spillover effects for electricity spot prices across different regions in the Australian National Electricity Market (NEM), aiming to provide a better understanding of price and volatility dynamics in a multi-regional context. This pioneering study is established in the econometric framework developed by Diebold and Yilmaz (2009, 2012), originally applied to equity markets. The research methodology is based on forecast error variance decomposition of vector autoregressive (VAR) models. We conduct both static and dynamic analyses to assess the systemically aggregated spillovers and their directional decomposition between regions. Using daily electricity spot market data from 2010 to 2015, we find that although spillover effects play an important role in the NEM, regional prices are still mostly influenced by local factors. In particular, greater spillover effects are observed between physically interconnected markets. Among all regions in the NEM, South Australia (SA) transmits the most net spillovers to others, while New South Wales (NSW) is the most significant net spillover receiver. The spillover effects show time-varying and event-dependent patterns. Our findings provide insights to market participants for the development of cross-regional trading or risk management strategies in the Australian NEM. As the Australian Energy Regulator considers building new interconnectors to facilitate regional market integration, our findings regarding connectedness of regional markets through the applied spillover measures also provide important quantitative information to NEM policy makers.