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Testing for Market Integration in the Australian National Electricity Market

The National Electricity Market was established in 1998 as a response to the overall liberalization and restructuring of the Australian electricity sector. The wholesale market integration effects of this establishment, however, remain to be systematically examined. We use econometric techniques based on pairwise unit root tests, cointegration analysis and a time varying coefficient model to study the extent of market integration in the physically interconnected regional markets based on daily electricity spot prices. The results from the pairwise unit root tests provide mixed evidence of price convergence while cointegration analysis does not reject the absence of persistent price differences across the physically interconnected regions. The results from the time-varying filtered coefficient model suggest that full market integration has not been achieved yet. We empirically show the presence of significant network losses and constraints across the interregional interconnectors in the NEM. Our findings suggest that convergence in generation and network ownership, coupled with harmonisation of network regulation and regulatory institutional framework, will be increasingly important factors in improving wholesale market integration across all energy-only markets as they experience an increase in the share of renewable energy.

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Energy Specializations: Electricity – Distributed Generation; Electricity – Generation Technologies; Electricity – Markets and Prices ; Electricity – Transmission and Network Management; Electricity; Electricity – Local Distribution

JEL Codes:
L94 - Electric Utilities
Q2 -
D42 - Market Structure, Pricing, and Design: Monopoly
D44 - Auctions

Keywords: Spot prices, Renewable energy, Market integration, Time series analysis

DOI: 10.5547/01956574.37.4.rnep

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Published in Volume 37, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.