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Directional Congestion and Regime Switching in a Long Memory Model for Electricity Prices

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Author Info
Haldrup; Niels
Morten Oerregaard Nielsen () (Department of Economics, University of Aarhus, Denmark)

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Abstract

The functioning of electricity markets has experienced increasing complexity as a result of deregulation in recent years. Consequently this affects the multilateral price behaviour across regions with physical exchange of power. It has been documented elsewhere that features such aslong memory and regime switching reflecting congestion and non-congestion periods are empirically relevant and hence are features that need to be taken into account when modeling price behavior. In the present paper we further elaborate on the co-existence of long memory and regime switches by focusing on the effect that the direction of possible congestion episodes has on the price dynamics. Under non-congestion prices are identical. The direction of possible congestion is identified by the region with excess demand of power through the sign of price differences and hence three different states can be considered: Non-congestion and congestion periods with excess demand in the one or the other region. Using data from the Nordic power exchange, Nord Pool, we find that the price dynamics and long memory features of the price series generally are rather different across the different states. Also, there is evidence of fractional cointegration at some grid points when conditioning on the states.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2005-18.

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Length: 23
Date of creation: 17 Oct 2005
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Handle: RePEc:aah:aarhec:2005-18

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Related research
Keywords: Cointegration electricity prices forecasting fractional integration and cointegration long memory Markov switching

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Find related papers by JEL classification:
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models

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