Day-Ahead Electricity Markets: Is There a Place For a Day-Ahead Market in NZEM?

In this paper we explain the operation and design of day-ahead markets in an electricity market. Day-ahead markets complement real-time markets which must be run to ensure balance in the system and offer a number of benefits to electricity market participants. We argue that in the context of the New Zealand electricity market the benefits of operating a day-ahead market are likely to outweigh the costs. We show that simple forecasts suggest day-ahead prices in New Zealand would be considerably less volatile than real-time prices. As day-ahead markets are effectively hedge markets for a short time period the issues we raise are also important for the operation and development of other longer-term hedge markets.