Assessing the Integration of Electricity Markets using Principal Component Analysis: Network and Market Structure Effects
Lewis T. Evans
Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR)
Victoria University of Wellington - School of Economics & Finance
May 31, 2006
The major diffculties in assessing market power in electricity wholesale spot markets mean that great weight should be placed upon assessing market outcomes against the fundamental determinants of supply, demand and competition. In this spirit we study whether the New Zealand market has been a national market or a set of local markets since its inception in 1996. Electricity markets generally have loop flows that require simultaneous assessment of prices at all nodes, thereby limiting the informativeness of pair-wise nodal comparisons. We introduce principal component analysis to this application and show that it is a natural tool for the qualitative and quantitative assessment of the presence of local markets. We find that increased competition induced some separation into local markets that was eliminated by transmission enhancement and the introduction of generation downstream from the constrained circuits. For most of the period New Zealand has had one national market.
Number of Pages in PDF File: 22
Keywords: Electricity, Market power, Principal component analysis
JEL Classification: D4, L1, L4
Date posted: June 2, 2006
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