Interconnectedness in the Australian national electricity market: A higher moment analysis

Abstract

We examine the risk transmission mechanisms in the interconnected Australian National Electricity Market (NEM). We illustrate that the transmission of extreme events in terms of their magnitude (via skewness) and the likelihood of their occurrence (via kurtosis) should be considered when promoting NEM interconnectedness. Our empirical findings suggest that interconnectedness costs can be limited by providing sufficient transmission capacities as it can expand generation capacity. Our results suggest that a one percent increase in NEM generation capacity can decrease the transmission of these risks by between 0.9 percent and 1.7 percent, depending on the moment of the electricity return distribution.