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The Incorporation of Hydro Storage into a Spot Price Model for the New Zealand Electricity Market

By E. Grant Read and Don C. Mcnickle


Recent econometric models of spot market prices are particularly well-suited for thermaldominated systems, in which extreme short-term price volatility and strong mean-reversion are dominant characteristics. In order for a purely econometric price model to perform well in the context of the New Zealand market, which is dominated by hydro generation, it needs to be modified to incorporate the physical factors that influence the price level. Hydrological factors, such as storage levels and inflows, are major drivers of hydro generator behaviour. Assuming that generators use modern reservoir management optimisations, both factors are taken into account in the calculation of marginal water values (MWVs), which, theoretically, form the basis of their supply offers. However, the MWVs are assessed internally and are not public knowledge; therefore some proxy for the MWV is required for modelling spot prices. We compare the estimated parameters of a leading econometric model when fitted to two spot price time series from the New Zealand Electricity Market, to show how water-shortages leading to high prices can complicate the price-modelling process. We then use reservoir management theory to extend the price model. The storage level is transformed into a crude measure of th

Topics: Electricity price, Time series, Price model, Deregulated market, Hydroelectric generation, Water storage * Corresponding author
Year: 2011
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