A New Zealand Electricity Market Model: Assessment of the Effect of Climate Change on Electricity Production and Consumption

Motu Working Paper 10-09

Posted: 19 Sep 2010 Last revised: 9 May 2013

See all articles by Lewis T. Evans

Lewis T. Evans

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Andrea Lu

The University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: September 1, 2010

Abstract

In this paper, we introduce an electricity market model and use it to explore the effect of climate change on electricity output and prices. It is calibrated to the New Zealand Electricity Market, and includes multiple generation fuels, uncertain fuel availability, and storage options. The model is formulated in continuous time, which mimics the many short trading periods that are common to electricity spot markets, while properly incorporating forward-looking generation decision making. Specifically, it is used to estimate the effects of changes that may arise in characteristics of fuels water and gas as a consequence of climate change and climate change policies. The model does this under the polar cases of a competitive market structure and monopoly. There are three key findings from the results. First, the results illustrate the importance of allowing for volatility and including management of storage in electricity market models. Second, they suggest that reductions in average hydro fuel availability will reduce welfare significantly. Increases in the volatility of hydro fuel availability will also affect welfare, but to a very small extent. Third, the value of reservoir expansion is sensitive to the distribution of hydro fuel availability. Finally, the effects of a carbon tax are also reported.

Keywords: dynamic optimisation, electricity spot market performance, stochastic fuel availability, storage options, climate change

JEL Classification: D4, D9, L1, L5, L9

Suggested Citation

Evans, Lewis T. and Guthrie, Graeme and Lu, Andrea Y., A New Zealand Electricity Market Model: Assessment of the Effect of Climate Change on Electricity Production and Consumption (September 1, 2010). Motu Working Paper 10-09. Available at SSRN: https://ssrn.com/abstract=1678282

Lewis T. Evans (Contact Author)

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR) ( email )

Wellington 6001
New Zealand
64 4 4635562 (Phone)
64 4 4635566 (Fax)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Andrea Y. Lu

The University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
Parkville, Victoria 3010 3010
Australia
+61383443326 (Phone)
+61383446914 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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