Forecasting the Impact of Generation Mix on Wholesale Electricity Prices in Australia

Abstract

This paper examines the impact of the generation mix, encompassing both fossil fuels (black and brown coal and natural gas) and renewables (hydro and wind power) across a range of technologies on daily spot electricity prices across the five regional electricity markets in the Australian National Electricity Market from January 2006 to June 2012. The main objective is to gain insights into the emergent effect of current government policy and industry developments regarding the choice of generation on wholesale electricity prices. This is because different generation mixes imply different market properties regarding energy costs (including the costs of the initial investment, operations and maintenance, and the costs of fuel and capital). Using least squares and quantile regressions, we find that the changing generation mix used for producing electricity exerts a strong influence on wholesale prices, with prices expected to increase markedly with the increasing utilization of gas-fired generation used to support the intermittent and variable production from renewables and from the policy driven use of renewables wind power associated with the current renewable energy target and carbon taxation in Australia.