Structural Volatility & Australian Electricity Market

Author: Ghazaleh Mohammadian

Mohammadian, Ghazaleh, 2016 Structural Volatility & Australian Electricity Market, Flinders University, School of Computer Science, Engineering and Mathematics

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Australian electricity market has accepted deregulation since the early 1990’s. The aims of deregulation of electricity supply included promoting market competition and ensuring reliable supply of electricity at stable prices to consumers. However, it has been observed that spot price for electricity can be volatile and occasionally spikes to extremely high levels. This thesis examines the latter phenomenon with the help of quantitative techniques of operations research and statistics. Closer examination shows that bidding behaviour of generators is affecting the price volatility in Australian electricity market especially in high demand periods. In particular, our analyses suggest that some of the observed volatility may be due to the underlying structure of the currently used optimisation model’s design that does not exclude the possibility of generators being able to exercise market power. We also propose a novel pricing mechanism designed to discourage strategic bidding.

In the preliminary analysis we discuss the history of price volatility and possible exercise of market power in Australia as mentioned in the literature. According to Australian Energy Regulator the significant increase in the number of price spikes occurred in South Australia during the years 2008-11 where “disorderly bidding strategies” by generators were addressed as one of the underlying reasons for this high electricity price fluctuations.

Exploratory analysis of data from South Australian electricity market identified and exhibited a number of phenomena which contribute to the high cost of electricity supply to consumers and volatility in spot prices. It identified certain characteristic bidding behaviours of generators during the periods when spot price spikes occurred. For this reason, the bidding behaviour by generators was investigated in detail. Our analysis showed that, observed bid structures exhibit bimodal form in higher demand trading intervals.

In particular, we considered the potential consequences of the fact that generators can influence some parameters of the dispatch linear program that is used to determine shadow prices of demands which, in turn, determine the spot price. Indirectly, this influence opens the possibility of them being able to impact the marginal prices of electricity in each state and hence also the spot prices. Indeed, due to the non-uniqueness of solutions to linear programs, a phenomenon that we call “instability gap” may arise whereby some optimal shadow prices favour the generators and some favour consumers.

We also considered changes to the electricity pricing mechanism aimed at creating disincentives to strategic bidding. We proposed a Mean-Value approach to determine the spot-price that is inspired by the famous concept of Aumann-Shapley Prices. We demonstrated that this approach has the potential for discouraging strategic bidding and for reducing the ultimate spot price for electricity. Furthermore, we showed how generators would benefit – under a mean value pricing scheme - by offering a uniformly distributed bid stack. Finally, we showed that the mean value pricing mechanism proposed above can be easily generalised to the whole network in NEM which consists of 5 interconnected regions.

Keywords: Australian Electricity Market, Price Volatility, Electricity price

Subject: Mathematics thesis

Thesis type: Doctor of Philosophy
Completed: 2016
School: School of Computer Science, Engineering and Mathematics
Supervisor: Professor Jerzy Filar