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Modelling Spikes in Electricity Prices

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Author Info
RALF BECKER
STAN HURN
VLAD PAVLOV

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Abstract

During 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. Copyright © 2007 The Economic Society of Australia.

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Publisher Info
Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 83 (2007)
Issue (Month): 263 (December)
Pages: 371-382
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Handle: RePEc:bla:ecorec:v:83:y:2007:i:263:p:371-382

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  1. T M Christensen & A S Hurn & K A Lindsay, 2008. "It never rains but it pours: Modelling the persistence of spikes in electricity prices," NCER Working Paper Series 25, National Centre for Econometric Research. [Downloadable!]
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This page was last updated on 2009-11-28.

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