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Electricity Spot Price Dynamics: Beyond Financial Models

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  • Guthrie, Graeme
  • Videbeck, Steen

Abstract

An increasing number of researchers attempt to model the behavior of electricity spot prices using statistical models commonly used to model financial asset prices. In this paper we reveal properties of electricity spot prices which such models cannot capture. Using six years of half-hourly price data from the New Zealand Electricity Market we find that the half-hourly trading periods fall naturally into five groups corresponding to the overnight off-peak the morning peak daytime off-peak evening peak and evening off peak. The prices in different trading periods within each group are highly correlated with each other yet the correlations between prices in different groups are lower. Models adopted from the modelling of security prices that are currently applied to electricity spot prices are incapable of capturing this behavior. We use a periodic autoregression to model prices instead showing that shocks in the peak periods are larger and less persistent than those in off peak periods and that they often reappear in the following peak period. In contrast shocks in the offpeak periods are smaller more persistent and die out (perhaps temporarily) during the peak periods. Current approaches to modelling spot prices cannot capture this behavior either.

Suggested Citation

  • Guthrie, Graeme & Videbeck, Steen, 2004. "Electricity Spot Price Dynamics: Beyond Financial Models," Working Paper Series 18961, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    • Handle: RePEc:vuw:vuwcsr:18961
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/18961
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    References listed on IDEAS

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    1. Markus Burger & Bernhard Klar & Alfred Muller & Gero Schindlmayr, 2004. "A spot market model for pricing derivatives in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 109-122.
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      • Stigler, George J. & Sherwin, Robert A., 1983. "The Extent of the Market," Working Papers 31, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
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