It is commonly known that wholesale spot electricity markets exhibit

high price volatility, strong mean-reversion and frequent extreme

price spikes. This paper employs a basic stochastic model, a mean-reverting

model and a regime-switching model to capture these

features in the Australian national electricity market (NEM),

comprising the interconnected markets of New South Wales,

Queensland, South Australia and Victoria. Daily spot prices from 1

January 1999 to 31 December 2004 are employed. The results show

that the regime-switching model outperforms the basic stochastic and

mean-reverting models. Electricity prices are also found to exhibit

stronger mean-reversion after a price spike than in the normal period,

and price volatility is more than fourteen times higher in spike periods

than in normal periods. The probability of a spike on any given day

ranges between 5.16% in NSW and 9.44% in Victoria.