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Efficiency of the California electricity reserves market

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Author Info
Konstantinos Metaxoglou (Department of Economics, University of California Davis, California, USA)
Aaron Smith (Department of Agricultural and Resource Economics, University of California, Davis, California, USA)

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Abstract

We test the efficiency of the California electricity reserves market by examining systematic differences between its day- and hour-ahead prices. We uncover significant day-ahead premia, which we attribute to market design characteristics. On the demand side, the market design established a principal-agent relationship between the markets' buyers (principal) and their supervisory authority (agent). The agent had very limited incentives to shift reserve purchases to the lower priced hour-ahead markets. On the supply side, the market design raised substantial entry barriers by precluding purely speculative trading and by introducing a complicated code of conduct that induced uncertainty about which actions were subject to regulatory scrutiny. We use a high-dimensional vector moving average model to estimate the premia and conduct correct inferences. To obtain exact maximum likelihood estimates of the model, we develop a new EM algorithm that seamlessly incorporates missing data and applies directly to general moving average time series models. Our algorithm uses only analytical expressions: the Kalman filter and a fixed interval smoother in the E step and least squares-type regressions in the M step. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.982
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File URL: http://qed.econ.queensu.ca:80/jae/2007-v22.6/
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 22 (2007)
Issue (Month): 6 ()
Pages: 1127-1144
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Handle: RePEc:jae:japmet:v:22:y:2007:i:6:p:1127-1144

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  1. Chao, Hung-Po & Wilson, Robert, 2002. "Multi-dimensional Procurement Auctions for Power Reserves: Robust Incentive-Compatible Scoring and Settlement Rules," Journal of Regulatory Economics, Springer, vol. 22(2), pages 161-83, September. [Downloadable!] (restricted)
  2. Peiris, M. Shelton, 1988. "On the study of some functions of multivariate ARMA processes," Journal of Multivariate Analysis, Elsevier, vol. 25(1), pages 146-151, April. [Downloadable!] (restricted)
  3. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September. [Downloadable!] (restricted)
  4. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, 06. [Downloadable!] (restricted)
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