Testing for Market Integration in the Australian National Electricity Market

Abstract

The 1990s witnessed a remarkable global experiment with the introduction of market-based reforms and the restructuring of the electricity sector. Australia established the National Electricity Market (NEM) on 13 December 1998 as a consequence of the restructuring and liberalisation of its electricity supply industry (ESI). One of the foremost objectives of wholesale electricity market reform in Australia, consistent with the electricity market reforms objectives in the European Union (EU), was to deepen competition in wholesale electricity trade and facilitate the fuller integration of the separate regional electricity markets into an efficient and integrated NEM. However, direct empirical evidence, based on econometric methods, as to whether the separate regional electricity markets in the NEM are fully integrated and well-functioning is missing. Empirical evidence on the role of direct interconnections and regional price linkages in achieving fuller integration of regional electricity markets into a NEM is also missing in the Australian context.This study aims to clarify to what extent the objective of creating an integrated NEM has been achieved since its establishment. Second, this paper adds to the limited number of studies analysing electricity market integration in island economies where the benefits of an integrated market are generally challenging because cross-border interconnections have, to date, been infeasible. Third, the empirical evidence on market integration can provide a significant additional input into the on-going policy debate concerning transmission investment strategies and network regulation arrangements across Australia. Furthermore, the impact of growing large scale trade of wholesale renewable power on the market integration outcomes of 'energy-only' markets has largely remained unexplored in the literature (Tangeras, 2015).We study market integration by obtaining a fuller understanding of the direct daily electricity spot pricing relationships (price convergence /divergence) between the interconnected regional electricity markets in the NEM. Price convergence (divergence) shows how strongly prices are related (unrelated) across similar markets and cointegration analyses can detect if the prices share a common long-run equilibrium (Johansen, 1995). However, cointegration is not very appropriate for studying a relatively new market that has an emergent connective structure and poised for the large scale uptake of wholesale renewable power. So, we also apply the Kalman filter methodology based on a state-space model that allows us to estimate time-varying coefficients (Kalman, 1960). A time-varying filtered coefficient indicates how strong pricing relationships are among the markets considered and gives us a guide to the level and development of market integration.

Electricity market integration, decarbonisation and security of supply: Dynamic volatility connectedness in the Irish and Great Britain markets

“…Most studies on electricity markets integration have involved studying the long-run spot price trends relationships between separate but physically interconnected liberalised markets such as in the US (e.g., Woo, Lloyd-Zanetti and Horowitz, 1997;De Vany andWalls, 1999 andDempster, Issacs andSmith, 2008); in Europe (see e.g., Zachmann, 2008;Castagneto-Gissey;Chaves and Fellani, 2014;Menezes and Houllier, 2014;Gugler et al 2018) and in Australia (Nepal and Foster, 2016;Apergis et al 2017a). Majority of these studies have used the bivariate and systems-based cointegration tests and Granger causality tests to test for long run price relationships (Woo, Lloyd-Zanetti and Horowitz, 1997;De Vany andWalls, 1999 andDempster, Issacs andSmith, 2008;Gugler et al 2018;Nepal and Foster, 2016).…”

“…However, cointegration analysis assumes a fixed structural relationships overtime which is problematic to assume among institutionally and technologically evolving restructured electricity markets. Thus, time varying long-run spot price relationships have been studied based on differing techniques such as fractional cointegration (Menezes and Houllier, 2014); state-space models based on Kalman filter algorithm (Zachmann, 2008;Nepal and Foster, 2016); network theory of interconnectedness (Castagneto-Gissey; Chaves and Fellani, 2014) and time varying price convergence tests based on Sul (2007, 2009) as in Apergis et al (2017a).…”

“…The theoretical appeal of an integrated energy market is in terms of improving security of supply, enhancing competition and inducing greater economic efficiency, as well as rendering environmental benefits by optimising variations in resource mix and demand patterns (Newbery et al, 2016). Hence, advanced economies such as the European Union (EU) began to consider a European Single Market for Electricity as early as 1986 (Pollitt, 2019) while OECD economies like Australia established the National Electricity Market in 1998 (Nepal and Foster, 2016). As a result, a few studies have attempted to measure the progress towards energy markets integration in the aftermath of energy markets liberalisation and gauge its effectiveness (Joskow.…”

Operational strategy analysis of electric vehicle battery swapping stations

“…It assumes that values for recharging and charging are near the limits of SoC max and SoC min . The accumulated use of the batteries u i, t is dependent on its previous value u i, t − 1 and the current charging or discharging state described in (4). SoH is approximated with the calendar fade constant α and cyclic fade β as in (5).…”

“…BSS could stimulate EV growth by addressing constraints such as high upfront battery cost, slow charging, and range concerns [3]. Using a coordinated strategy, EV batteries can be used for grid storage facilities to balance peak loads experienced in the deregulated electricity grid [4][5][6][7][8]. Given that the batteries in a BSS can have an aggregated impact on the electricity demand profile [9], a robust operational strategy is needed to mitigate failure.…”