Assessing Tail Dependence in Electricity Markets

Abstract

Tail dependence characterizes cross market linkages during periods of extreme price behavior. Analyzing tail dependence can richly inform market participants, in particular those operating across several markets how to understand price risk. A copula approach is therefore employed to assess the tail dependence across regional electricity markets. We use daily data from five Australia's regional electricity markets (Queensland, New South Wales, Victoria, South Australia and Tasmania). We find significant tail dependence between wholesale electricity prices indicating that especially extreme price observations like price spikes tend to occur jointly across these markets. Our results provide market participants with more timely suggestions for effective risk management and hedging strategies.