Nonlinear impacts of distributed generation on extreme electricity prices under policy shocks: Evidence from New Zealand's oil and gas exploration ban

Guanghao Wang, Hongtao Wan and Erwann Sbai

Energy, 2025, vol. 335, issue C

Abstract: This study investigates the asymmetric impact of Distributed Generation (DG) penetration on extreme wholesale electricity price movements in New Zealand, using the 2018 oil and gas exploration ban as a structural policy shock. By integrating benchmark fixed effects and System-GMM estimations with a Quantile Autoregressive Distributed Lag (QARDL) model, we explore how DG influences both lower-tail (ED) and upper-tail (EI) price volatility before and after the ban. Empirical results reveal that prior to the ban, higher DG penetration was significantly associated with a reduction in EI and a modest elevation in ED in the short run, helping stabilize the system by smoothing marginal price risks. However, in the long run, oversupply effects—particularly from solar—led to a rise in the frequency of ED events, suggesting unintended downward pressure during low-demand periods. After the ban, DG's regulatory role shifted: in the ED regime, DG deepened low-price suppression and volatility, while in the EI regime, it failed to mitigate upward price pressures due to fossil fuel constraints and reduced system flexibility. The system stability coefficient ρ from the QARDL-ECM specification indicates slower price mean-reversion post-ban, highlighting increased market fragility. These findings suggest that DG's effect on market stability is not static but highly state-dependent and shaped by policy context. While DG can contribute to long-term price smoothing, its short-term stabilizing capacity weakens under supply shocks and institutional constraints. To enhance system resilience, policymakers must complement DG expansion with investment in energy storage, demand-side flexibility, and diversified generation sources. Without these, DG alone may amplify rather than mitigate extreme price risks under transition pressures.

Keywords: Distributed generation; Quantile autoregressive distributed lag model; Wholesale electricity prices; New Zealand (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:335:y:2025:i:c:s0360544225033961

DOI: 10.1016/j.energy.2025.137754

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