http://www.erasmusenergy.com en-us N/A dejong@maycroft.com Fri, 08 Aug 2008 00:55:39 CEST 20 http://www.erasmusenergy.com/articles/164/1/Towards-a-European-market-of-electricity-Spot-and-derivatives-trading/Page1.html Published in:
Publication year: 2002

Deregulation of electricity markets is spreading worldwide at a high speed : it has been completed for some years in Scandinavia and the United Kingdom, is well under way in the United States and being embraced in most continental Western Europe outside France. Germany and the Netherlands are quite deregulated, followed by Spain. Italy is establishing power trading in a competitive environment. This represents a multi-billion spot market that is developing very quickly. And the same pattern of evolution as in the financial markets is being observed, with the growth of a variety of derivative instruments such as forward and Futures contracts swaps, plain-vanilla and exotic options.
The main problem associated with the pricing of those derivatives is that the fundamental financial models were established for stocks and bonds and do not capture the unique features of electricity, in particular the non-storability (except for hydroelectricity), the seasonality and spikes of prices, the difficulties of transportation, (existence of high voltage lines, constraints at the hubs imposed by the Kirchoff laws), not to mention the necessity for the European Community to define clear rules for cross-border electricity transmission.
The goal of this paper is to discuss the main features of electricity spot prices and investigate the pricing issues attached to power options.]]> no@spam.com (Helyette Geman) Tue, 19 Feb 2008 13:35:18 CET http://www.erasmusenergy.com/articles/164/1/Towards-a-European-market-of-electricity-Spot-and-derivatives-trading/Page1.html http://www.erasmusenergy.com/articles/159/1/Strategic-Behavior-in-Spot-Markets-for-Electricity-when-Load-is-Stochastic/Page1.html Published in:
Publication year: 2000

In the first part of the paper, daily price data for the past three summer seasons in the PJM wholesale market are used to estimate a stochastic regime switching model. These data show that the average price in 1999, when market-based offers were allowed, was twice as high as it was in the previous two seasons when offers had to be cost-based. The primary cause was that the price spikes in 1999 were much higher than they were in 1997-98, but not more frequent. The second part of the paper derives an optimum set of offers for individual suppliers endowed with different levels of market power. A supplier controlling generation equivalent to 20% of the expected load in the market is shown to submit offers that are up to 80% higher than the true cost. Nevertheless, these offers are still much lower than the offers that set the high prices in the PJM market. The explanation is that suppliers with sufficient market power are indifferent to whether or not marginal units are dispatched, and they can set high offers on these units without forfeiting expected profits.
The author wishes to thank Yumei Ning for research assistance in estimating the price models in Section 2, and Jonell Blakeley and Dan Chapman for help preparing the manuscript. All remaining errors are the responsibility of the author.]]> no@spam.com (Tim Mount) Mon, 28 Jan 2008 16:52:09 CET http://www.erasmusenergy.com/articles/159/1/Strategic-Behavior-in-Spot-Markets-for-Electricity-when-Load-is-Stochastic/Page1.html http://www.erasmusenergy.com/articles/155/1/Spot-price-simulation-and-volatility-analysis-in-the-future-Iberian-electricity-market/Page1.html Published in:
Publication year:
Co-author 1: Joao Lagarto
Co-author 2: Rui Pestana

Price volatility is a major issue in liberalized electricity markets as far as risk management is concerned. In this paper we evaluate the impact of the Portuguese and Spanish electricity markets integration on the day-ahead market price volatility. For that purpose we develop an adaptive conjectural variations model which is implemented in GAMS language. We estimate the degree of competition in the Spanish pool using an iterative secant method applied to a conjectural variations oligopoly model. Using the estimate obtained, we simulate the Portuguese and Spanish markets in autarky and the integrated market, known as the Iberian Electricity Market (IBELM). We present conclusions on the impact of the IBELM on prices and volatilities from the Portuguese and Spanish markets point of view.]]> no@spam.com (Jorge Sousa) Mon, 28 Jan 2008 14:59:54 CET http://www.erasmusenergy.com/articles/155/1/Spot-price-simulation-and-volatility-analysis-in-the-future-Iberian-electricity-market/Page1.html http://www.erasmusenergy.com/articles/153/1/Heavy-tails-and-electricity-prices/Page1.html Published in:
Publication year: 2005

In the first years after the emergence of deregulated power markets it became apparent that for the valuation of electricity derivatives we cannot simply rely on models developed for financial or other commodity markets. However, before adequate models can be put forward the unique characteristics of electricity (spot) prices have to be thoroughly analyzed. In particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of returns. In this paper we first analyze the stylized facts of electricity prices, then present two modeling approaches: jump-diffusion and regime-switching, which to some extent address the pertinent issues.]]> no@spam.com (Rafal Weron) Mon, 28 Jan 2008 12:42:11 CET http://www.erasmusenergy.com/articles/153/1/Heavy-tails-and-electricity-prices/Page1.html http://www.erasmusenergy.com/articles/152/1/Forecasting-spot-electricity-prices-with-time-series-models/Page1.html Published in:
Publication year: 2005
Co-author 1: Adam Misiorek

In this paper we study simple time series models and assess their forecasting performance. In particular we calibrate ARMA and ARMAX (where the exogenous variable is the system load) processes. Models are tested on a time series of California power market system prices and loads from the period proceeding and including the market crash.]]> no@spam.com (Rafal Weron) Mon, 28 Jan 2008 11:55:21 CET http://www.erasmusenergy.com/articles/152/1/Forecasting-spot-electricity-prices-with-time-series-models/Page1.html http://www.erasmusenergy.com/articles/151/1/Estimating-the-volatility-of-spot-prices-in-restructures-electricity-markets-and-the-implications-for-option-values/Page1.html Published in:
Publication year: 1998
Co-author 1: Tim Mount

The contingent claims valuation of physical assets and financial derivatives depends critically on the specification and estimation of the stochastic process that describes the price path. Accurate valuation of claims based on competitive electricity prices has proved problematic, as electricity price data are not well represented by traditional commodity price models of Brownian motion. Observed on-peak (high demand period) electricity spot prices are highly volatile and strongly mean reverting, infrequently punctuated by large upward jumps which quickly drop toward the mean price level.1 Existing commodity price characterizations do not capture this dynamic, though they are often used as there is no established alternative.2 Based on these stylized facts, continuous time models for real options and financial derivatives where the underlying state variable is the spot price of electricity have been proposed (Ethier 1997, 1999, Barz and Johnson 1998, Deng 1998). To date, these models have not been fit to market data, nor has econometric testing been undertaken.
This paper tests the stylized facts which have evolved with the accumulation of data from competitive electricity prices, estimating a mean reverting price process with stochastic regime switching which allows discontinuous jumps in electricity prices. The non-linear econometric model allows complex state dynamics and the standard models of commodity prices are special cases of the proposed model. Although the model allows complex transition dynamics, it remains tractable for financial applications and requires only observed price data for estimation and forecasting. Thus the problem is a fundamental one: to characterize the marginal distribution of electricity prices. This task is also a logical precursor to the estimation of joint distributions potentially of interest to electricity market participants (e.g. electricity prices and natural gas spot prices).]]> no@spam.com (Robert Ethier) Mon, 28 Jan 2008 11:48:35 CET http://www.erasmusenergy.com/articles/151/1/Estimating-the-volatility-of-spot-prices-in-restructures-electricity-markets-and-the-implications-for-option-values/Page1.html http://www.erasmusenergy.com/articles/150/1/An-Analysis-of-Price-Volatility-in-Different-Spot-Markets-for-Electricity-in-USA/Page1.html Published in:
Publication year:
Co-author 1: Yumei Ning
Co-author 2: Hyungna Oh

Earlier research has shown that the behavior of spot prices in the new auction markets for electricity can be described by a stochastic regime-switching model. This model captures the observed price spikes that occur in these markets, particularly during the summer months when levels of load are high. The first part of the paper shows how the exploitation of market power can lead to offers to sell power that are consistent with price spikes. An important feature of the model is that some suppliers are indifferent to having marginal units dispatched when they have sufficient market power. Given this analytical framework, the second part of the paper extends the regime switching model of prices by making key parameters functions of forecasted load. The first application shows how the structure of the PJM market changed when market-based offers were allowed, resulting in higher price spikes. The second application compares price behavior in PJM, New England and California. The transition probabilities in the the markets have similar relationships to load. The main differences among markets are the levels of the means in the high-price regime, and in this respect, PJM is quite different from the other two markets. Efforts to associate price spikes with errors in the forecasts of load or changes of actual load were not successful. The conclusion is that more research is needed to understand the motivation of suppliers submitting offers into an auction market.]]> no@spam.com (Tim Mount) Mon, 28 Jan 2008 11:29:20 CET http://www.erasmusenergy.com/articles/150/1/An-Analysis-of-Price-Volatility-in-Different-Spot-Markets-for-Electricity-in-USA/Page1.html http://www.erasmusenergy.com/articles/145/1/Modeling-highly-volatile-and-seasonal-markets-evidence-from-the-Nord-Pool-electricity-market/Page1.html Published in: Applications of econophysics
Publication year: 2004
Co-author 1: Ingve Simonsen
Co-author 2: Piotr Wilman

In this paper we address the issue of modeling spot electricity prices. After analyzing factors leading to the unobservable in other financial or commodity markets price dynamics we propose a mean reverting jump diffusion model. We fit the model to data from the Nord Pool power exchange and find that it nearly duplicates the spot price’s main characteristics. The model can thus be used for risk management and pricing derivatives written on the spot electricity price.]]> no@spam.com (Rafal Weron) Mon, 07 Jan 2008 16:16:05 CET http://www.erasmusenergy.com/articles/145/1/Modeling-highly-volatile-and-seasonal-markets-evidence-from-the-Nord-Pool-electricity-market/Page1.html http://www.erasmusenergy.com/articles/144/1/Understanding-Electricity-Price-Volatility-Within-and-Across-Markets/Page1.html Published in:
Publication year: 2003
Co-author 1: G. Andrew Karolyi

This study analyzes how electricity price volatility evolves over time for different electricity trading hubs in several deregulated markets around the world. The goal is to uncover common features across hubs within each market in the daily on-peak price volatility processes related to seasonality, mean reversion, conditionally autoregressive heteroskedasticity (ARCH) and possibly time-dependent jumps. We apply our analysis to markets in Australia, U.S., and the Nordic Power Exchange. We show that ARCH and time-dependent jumps are important statistical features of price volatility across all hubs in each market but with different levels of intensity. We also find that inferences about the role of seasonality components is sensitive to modeling of the ARCH and jump features.]]> no@spam.com (Mika Goto) Mon, 07 Jan 2008 14:29:16 CET http://www.erasmusenergy.com/articles/144/1/Understanding-Electricity-Price-Volatility-Within-and-Across-Markets/Page1.html http://www.erasmusenergy.com/articles/141/1/The-Nature-of-Power-Spikes-A-Regime-Switch-Approach/Page1.html Published in: Studies in non-linear dynamics & econometrics
Publication year: 2006

Due to its non-storable nature, electricity is a commodity with probably the most volatile spot prices, exemplified by occasional spikes. Appropriate pricing, portfolio, and risk management models have to incorporate these characteristics, and the spikes in particular. We investigate the nature of power spikes in a number of different markets. We test what time-series model is best able to capture the dynamics of these disruptive spot prices. We use regime-switching models to infer whether the price spikes should be treated as abnormal and independent deviations from the ‘normal’ price dynamics or whether they form an integral part of the price process. We test the time-series models on day-ahead markets in Europe and the US. We find that regime-switch models are better able to capture the market dynamics than a GARCH(1,1) or Poisson jump model. We also find clear differences between the markets and attribute part of the differences to the share of hydro-power in the total supply stack: hydro-power serves as an indirect means to store electricity, which has a dampening effect on spikes.]]> no@spam.com (Cyriel de Jong) Mon, 31 Dec 2007 12:42:53 CET http://www.erasmusenergy.com/articles/141/1/The-Nature-of-Power-Spikes-A-Regime-Switch-Approach/Page1.html