Assessing the Integration of Electricity Markets using Principal Component Analysis: Network and Market Structure Effects

22 Pages Posted: 2 Jun 2006  

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

Steen Videbeck

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2006

Abstract

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.

Keywords: Electricity, Market power, Principal component analysis

JEL Classification: D4, L1, L4

Suggested Citation

Evans, Lewis T. and Guthrie, Graeme and Videbeck, Steen, Assessing the Integration of Electricity Markets using Principal Component Analysis: Network and Market Structure Effects (May 31, 2006). Available at SSRN: https://ssrn.com/abstract=906043 or http://dx.doi.org/10.2139/ssrn.906043

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 6001
New Zealand
64 4 463 5763 (Phone)
64 4 495 5014 (Fax)

HOME PAGE: http://contemporaryfinance.com/

Steen Videbeck

Cornell University ( email )

Ithaca, NY 14853
United States

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