Interconnectedness in the Australian National Electricity Market: a higher-moment analysis

We examine the risk transmission mechanisms in the interconnected Australian National Electricity Market (NEM). We illustrate that the transmission of extreme events should be considered in terms of their magnitude (via skewness) and the likelihood of their occurrence (via kurtosis) when promoting NEM interconnectedness. Our empirical findings suggest that interconnectedness costs can be limited by providing sufficient transmission capacity as it can expand generation capacity. Our results suggest that a 1 per cent increase in NEM generation capacity can decrease the transmission of these risks by between 0.9 and 1.7 per cent, depending on the moment of the electricity return distribution.