Modelling Spikes in Electricity Prices

uring periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes therefore is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models that assume normality of the prices in each state, the model presented here uses a generalised beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes.

Semi-parametric forecasting of spikes in electricity prices

The occurrence of extreme movements in the spot price of electricity represents a significant source of risk to retailers. A range of approaches have been considered with respect to modelling electricity prices; these models, however, have relied on time-series approaches, which typically use restrictive decay schemes placing greater weight on more recent observations. This study develops an alternative, semi-parametric method for forecasting, which uses state-dependent weights derived from a kernel function. The forecasts that are obtained using this method are accurate and therefore potentially useful to electricity retailers in terms of risk management.

Evaluation of dynamic pass-through of carbon prices into electricity prices – a cointegrated VECM analysis

This paper addresses the impact of the CO2 opportunity cost on the wholesale electricity price in the context of the Iberian electricity market (MIBEL), namely on the Portuguese system, for the period corresponding to the Phase II of the European Union Emission Trading Scheme (EU ETS). In the econometric analysis a vector error correction model (VECM) is specified to estimate both long–run equilibrium relations and short–run interactions between the electricity price and the fuel (natural gas and coal) and carbon prices. The model is estimated using daily spot market prices and the four commodities prices are jointly modelled as endogenous variables. Moreover, a set of exogenous variables is incorporated in order to account for the electricity demand conditions (temperature) and the electricity generation mix (quantity of electricity traded according the technology used). The outcomes for the Portuguese electricity system suggest that the dynamic pass–through of carbon prices into electricity prices is strongly significant and a long–run elasticity was estimated (equilibrium relation) that is aligned with studies that have been conducted for other markets.

The case of negative day-ahead electricity prices

In recent years, Germany has significantly increased its share of electricity produced from renewable sources, which is mainly due to the Renewable Energy Act (EEG). The EEG substantially impacts the dynamics of intra-day electricity prices by increasing the likelihood of negative prices. In this paper, we present a non-Gaussian process to model German intra-day electricity prices and propose an estimation procedure for this model. Most importantly, our model is able to generate extreme positive and negative spikes. A simulation study demonstrates the ability of our model to capture the characteristics of the data.

Forecasting Electricity Prices and their volatilities using Unobserved Components.

The liberalization of electricity markets more than ten years ago in the vast majority of developed countries has introduced the need of modelling and forecasting electricity prices and volatilities, both in the short and long term. Thus, there is a need of providing methodology that is able to deal with the most important features of electricity price series, which are well known for presenting not only structure in conditional mean but also time-varying conditional variances. In this work we propose a new model, which allows to extract conditionally heteroskedastic common factors from the vector of electricity prices. These common factors are jointly estimated as well as their relationship with the original vector of series, and the dynamics affecting both their conditional mean and variance. The estimation of the model is carried out under the state-space formulation. The new model proposed is applied to extract seasonal common dynamic factors as well as common volatility factors for electricity prices and the estimation results are used to forecast electricity prices and their volatilities in the Spanish zone of the Iberian Market. Several simplified/alternative models are also considered as benchmarks to illustrate that the proposed approach is superior to all of them in terms of explanatory and predictive power.

Modelling and forecasting fossil fuels, CO2 and electricity prices and their volatilities

In the current uncertain context that affects both the world economy and the energy sector, with the rapid increase in the prices of oil and gas and the very unstable political situation that affects some of the largest raw materials’ producers, there is a need for developing efficient and powerful quantitative tools that allow to model and forecast fossil fuel prices, CO2 emission allowances prices as well as electricity prices. This will improve decision making for all the agents involved in energy issues. Although there are papers focused on modelling fossil fuel prices, CO2 prices and electricity prices, the literature is scarce on attempts to consider all of them together. This paper focuses on both building a multivariate model for the aforementioned prices and comparing its results with those of univariate ones, in terms of prediction accuracy (univariate and multivariate models are compared for a large span of days, all in the first 4 months in 2011) as well as extracting common features in the volatilities of the prices of all these relevant magnitudes. The common features in volatility are extracted by means of a conditionally heteroskedastic dynamic factor model which allows to solve the curse of dimensionality problem that commonly arises when estimating multivariate GARCH models. Additionally, the common volatility factors obtained are useful for improving the forecasting intervals and have a nice economical interpretation. Besides, the results obtained and methodology proposed can be useful as a starting point for risk management or portfolio optimization under uncertainty in the current context of energy markets.

Mixed models for short-run forecasting of electricity prices: Application for the Spanish market

Short-run forecasting of electricity prices has become necessary for power generation unit schedule, since it is the basis of every profit maximization strategy. In this article a new and very easy method to compute accurate forecasts for electricity prices using mixed models is proposed. The main idea is to develop an efficient tool for one-step-ahead forecasting in the future, combining several prediction methods for which forecasting performance has been checked and compared for a span of several years. Also as a novelty, the 24 hourly time series has been modelled separately, instead of the complete time series of the prices. This allows one to take advantage of the homogeneity of these 24 time series. The purpose of this paper is to select the model that leads to smaller prediction errors and to obtain the appropriate length of time to use for forecasting. These results have been obtained by means of a computational experiment. A mixed model which combines the advantages of the two new models discussed is proposed. Some numerical results for the Spanish market are shown, but this new methodology can be applied to other electricity markets as well

Optimal Combined Forecasts for Electricity Prices: Influence of Clean Energies

In this work, an electricity price forecasting model is developed. The performance of the proposed approach is improved by considering renewable energies (wind power and hydro generation) as explanatory variables. Additionally, the resulting forecasts are obtained as an optimal combination of a set of several univariate and multivariate time series models. The large computational experiment carried out using out-of-sample forecasts for every hour and day allows withdrawing statistically sound conclusions

Unit Commitment and Electricity Prices Forecasting for Market Strategy Preparation in Interconnected Systems

In this paper we present a solution for building a better strategy to take part in external electricity markets. For an optimal strategy development, both the internal system costs as well as the future values of the series of electricity prices in external markets need to be known. But in practice, the real problems that must be faced are that both future electricity prices and costs are unknown. Thus, the first ones must be modeled and forecasted and the costs must be calculated. Our methodology for building an optimal strategy consists of three steps: The first step is modeling and forecasting market prices in external systems. The second step is the cost calculation on internal system taking into account the expected prices in the first step. The third step is based on the results of the previous steps, and consists of preparing the bids for external markets. The main goal is to reduce consumers' costs unlike many others that are oriented to increase GenCo's profits.