Most power market structures have been developed and implemented without being tested, causing major problems such as shortages and blackouts. The main cause for these problems is the inability of some markets to provide adequate stimulus for new generation investments. The installed generation capacity goes through boom and bust cycles, exposing consumers to potential shortages during long bust periods.

With the realisation that the power market has a strong interaction with generation investment, a System Dynamics (SD) model is developed to study how the market interacts with generation expansion. The SD model also allows for market structures and policies to be evaluated before being implemented. It can be an important tool in ensuring that generation expansion is done optimally without the expense of energy security.

New Zealand’s generation capacity is no exception to the boom and bust trend. Since the commencement of the New Zealand Energy Market (NZEM) in October 1996, energy shortages occurred in the winters of 2001, 2003 and 2008. As a case study, an SD model is developed to study the NZEM. The results show that under some forecasted scenarios, New Zealand is susceptible to future energy shortages due to boom and bust cycles in the generation capacity.