Kelly Neill - Research

Publications

Pass-Through Of International Fossil Fuel Prices to Electricity Prices, Forthcoming
with Tiho Ancev and Songze Qu, Energy Economics, ssrn
We estimate pass-through of international fossil fuel prices to wholesale electricity prices in Australia, where approximately 85% of coal and 75% of natural gas is exported. Using station-level offer prices from the National Electricity Market over the period 2018--2023, we find high rates of pass-through. For black coal power stations, long-run pass-through of coal export prices is approximately 70%, though short-run variations remain insulated. For natural gas power stations, the relevant international benchmark shifts, depending on spare LNG export capacity. Before 2021, the Asian spot price (JKM) is passed through in full. Thereafter, it is passed through only when export terminals have spare capacity: during Australian winters. Otherwise, Brent is passed through, consistent with reported Brent-linked natural gas contract prices. Storage operators -- both reservoir hydro and pumped hydro -- also pass through international fossil fuel prices at rates comparable to thermal generators. This reflects the dependence of their opportunity costs on fossil fuels. These findings have direct policy implications. Our results suggest that a proposed gas reservation policy may not reduce electricity prices during peak winter periods. In addition, the pass-through we document implies that international commodity futures can be used to hedge some wholesale electricity price risk.
Western Australia's Domestic Gas Reservation Policy: Modelling the Economic Impact with a CGE Approach, 2019
(with Peter Hartley, Rod Tyers, and Philip Adams) Published in The Economic Record
Western Australia's Domestic Gas Reservation Policy: The Elemental Economics, 2017
Published in Economic Papers: A Journal of Applied Economics and Policy

Working Papers

Inferring the Value of Stored Water in Hydroelectric Schemes
with Daniel Arzhintar, Gordon Leslie and Paul Wyrwoll, under submission, ssrn

Water stored in hydroelectric schemes is valuable for electricity generation and non-market or environmental uses, but is rarely traded, so its value is typically unobserved. We develop a revealed preference approach that recovers a hydroelectricity operator's valuation of stored water from its bidding behavior in a wholesale electricity market, without solving the operator's dynamic optimization problem. Applied to a large hydroelectric scheme, the estimated valuation exhibits near-complete passthrough of an exchange-traded electricity futures price, and declines with reservoir volumes and snowpack depth. This approach can form the basis for administered water prices that enable flexible transfers to non-energy uses.

Ramping Up: Accommodating Solar in a Coal-Fired Grid
with Alastair Fraser and Jiaxi Song, Revise and Resubmit

Solar generation reduces wholesale electricity prices during the day but can raise them in the evening, as fossil-fuel plants shut down in response to low daytime prices and face costs to restart. This mechanism has been documented in grids where natural gas dominates dispatchable generation, but our findings indicate that this is not an inevitable consequence of high solar generation. We study a coal-heavy grid with high solar penetration. While solar substantially reduces daytime prices, it has at most a small effect on evening prices. The key is how coal responds: rather than shutting down, coal plants ramp down to minimum stable operating levels and ramp back up to meet the evening peak, avoiding startup costs and limiting the impact on evening prices. Hydro, acting as long-duration storage, further buffers the system by shifting generation from daytime to nighttime hours. Our results suggest that solar-induced coal exit may occur later than conventionally assumed.

Vertical bargaining under an export shock
with Yiran Xie

Recent work highlights that vertical bargaining conduct is not arbitrary but can be predicted based on an industry's primitive features. We investigate an observed change in bargaining behavior in the Australian natural gas sector, following a large export shock. The shock led to higher marginal production costs and greater participation in short-term markets, both of which affect bargaining conduct. We test whether the observed change in conduct is consistent with theoretical predictions and apply our model to assess government policy proposals.

Gas Games with Electricity

If large natural gas firms also generate electricity, is this detrimental for competition and trade? I consider eastern Australia, where both electricity and gas markets are operated as uniform-price auctions, and large firms participate across both. I estimate a supply function equilibrium model for the gas market, allowing for firms' asymmetric information about electricity. Two potential issues arise. First, when gas firms generate electricity from non-gas fuels, such as coal and renewables, they may have incentive to raise the gas costs for rival gas-fired generators, because this is passed through to higher electricity prices. I estimate that this has raised the price of gas on average, but by a modest 0.8 percent. Second, the realized gas price reveals rivals' signals about gas-fired electricity generation levels, so at higher gas prices firms shade their gas supply more. This leads to steeper gas-market supply schedules, exacerbating market power. I estimate that this adverse selection has reduced gains from trade in the gas market by 10 percent on average. Increasing the frequency with which the gas market is cleared could improve market outcomes.

Work in Progress

Coal Power Retirements and Electricity Prices
with Dakyung Seong and Won-Ki Seo

Policy Writing

Abundant, but not. Australia’s Gas Policy Problem, Forbes, 2020 July 21. link

Why Natural Gas Price Caps in Australia are Poor Policy, 2023 February 7. link