Understanding the complex relationship between hydroelectric and thermoelectric generation and electricity prices

We examine the connectedness among hydroelectric (reservoir volume), thermoelectric electricity (oil, gas) generation and electricity prices in systems predominantly reliant on hydroelectric generation, and thermoelectric power plays a crucial role in stabilizing supply, particularly during periods of low reservoir volumes caused by climatic variations. We employ connectedness approaches in both average and tail distribution analyses to evaluate the direction and magnitude of the influence among oil price, gas price, reservoir volume, and electricity demand on the distribution of electricity prices. The research highlights that under normal circumstances, reservoir volume is the main contributor to volatility in electricity prices. In extreme scenarios, occurring in the tail of the distribution when water reservoirs are depleted and hydroelectric power supply is limited, thermoelectric generation using commodities like gas and oil becomes crucial as the primary transmitter of volatility. The heightened connectedness with these commodities is attributed to a significant increase or substantial decrease in electricity prices.