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 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.