A New Zealand Electricity Market Model: Assessment of the Effect of Climate Change on Electricity Production and Consumption

Lewis Evans, Graeme Guthrie and Andrea Lu

No 10_09, Working Papers from Motu Economic and Public Policy Research

Abstract: In this paper, we introduce an electricity market model and use it to explore the effect of climate change on electricity output and prices. It is calibrated to the New Zealand Electricity Market, and includes multiple generation fuels, uncertain fuel availability, and storage options. The model is formulated in continuous time, which mimics the many short trading periods that are common to electricity spot markets, while properly incorporating forward-looking generation decision making. Specifically, it is used to estimate the effects of changes that may arise in characteristics of fuels -water and gas- as a consequence of climate change and climate change policies. The model does this under the polar cases of a competitive market structure and monopoly. There are three key findings from the results. First, the results illustrate the importance of allowing for volatility and including management of storage in electricity market models. Second, they suggest that reductions in average hydro fuel availability will reduce welfare significantly. Increases in the volatility of hydro fuel availability will also affect welfare, but to a very small extent. Third, the value of reservoir expansion is sensitive to the distribution of hydro fuel availability. Finally, the effects of a carbon tax are also reported.

Keywords: dynamic optimisation; electricity spot market performance; stochastic fuel availability; storage options; climate change (search for similar items in EconPapers)
JEL-codes: D4 D9 L1 L5 L9 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2010-09
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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