Abstract:
In this paper we introduce a model of an electricity market and use it to explore the effect of climate change on electricity prices and output. It has multiple generation fuels uncertain fuel availability and storage options. The model is formulated in continuous time which mimics the many short trading periods common to electricity spot markets. It properly incorporates forward-looking generation decision making. It is calibrated to the New Zealand Electricity Market and 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. It does so under the polar cases of a competitive market structure and monopoly. The results illustrate the importance of allowing for volatility and including management of storage in electricity market models. They suggest that reductions in average hydro fuel availability will reduce welfare significantly that increases in the volatility of hydro fuel availability will also affect welfare but to a very small extent and that the value of reservoir expansion is sensitive to the distribution of hydro fuel availability. The effects of a carbon tax are reported.
