Tail risk connectedness in the Australian National Electricity Markets: The impact of rare events

The tail risks can exhibit different and important features than average measures of risk in interconnected electricity markets. This paper examines the interconnectedness of tail risks within the regionally interconnected Australian National Electricity Market. We use the Conditional Autoregressive Value-at-Risk (CAViaR) and time-varying parameter vector autoregression (TVP-VAR) connectedness approach. Analysing historical data between 01 January 2006 and 04 February 2024. The results show significant levels of connectedness for both negative and positive tail risks, highlighting the dynamic and interdependent nature of these markets. Notably, we identify asymmetries in the transmission of tail risks and their key drivers, including oil market volatility and global geopolitical risks. Our findings show that some regions play a pivotal role in the risk dynamics across the regions of the network and the influence of energy source diversity on risk profiles. The study underscores the complexity of managing the expected increase in tail risks in interconnected electricity markets, emphasizing the need for adaptive, forward-thinking strategies tailored to evolving global and local conditions. • Tail risk spillover among Australian regional electricity markets is significant and asymmetrical. • South Australia exhibits the highest levels of both positive and negative tail risk, while New South Wales shows the lowest levels. • Victoria and South Australia are key net transmitters of tail risk; New South Wales and Tasmania are primary absorbers. • Tail risk spillover effects fluctuate greatly over time. • Global uncertainties and the Australian term spread significantly impact tail risk connectedness among regional electricity markets.