Transmission of prices and price volatility in Australian electricity spot markets: A multivariate GARCH analysis

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Worthington, Andrew
Kay-Spratley, Adam
Higgs, Helen
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Derek Bunn

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2005
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Abstract

This paper examines the transmission of spot electricity prices and price volatility among the five regional electricity markets in the Australian National Electricity Market (NEM): namely, New South Wales (NSW), Queensland (QLD), South Australia (SA), the Snowy Mountains Hydroelectric Scheme (SNO) and Victoria (VIC). A multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model is used to identify the source and magnitude of price and price volatility spillovers. The results indicate the presence of positive own mean spillovers in only a small number of markets and no mean spillovers between any of the markets. This appears to be directly related to the physical transfer limitations of the present system of regional interconnection. Nevertheless, the large number of significant own-volatility and cross-volatility spillovers in all five markets indicates the presence of strong ARCH and GARCH effects. This indicates that shocks in some markets will affect price volatility in others. Finally, and contrary to evidence from studies in North American electricity markets, the results also indicate that Australian electricity spot prices are stationary.

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Energy Economics

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27

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2

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© 2005 Elsevier. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.

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Electrical and Electronic Engineering

Mechanical Engineering

Applied Economics

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