Properties of Electricity Prices and the Drivers of Interconnector Revenue
AbstractThis paper examines the drivers behind revenues of merchant electricity interconnectors and the effect of arbitrage trading over interconnectors on the level and volatility of electricity prices in the connected markets. It sets out a simulation methodology that allows the stochastic and deterministic properties of prices, as well as most model parameters, to be varied freely. The effect of electricity flows over interconnectors on prices and thus on interconnector revenues is modelled explicitly by a mathematical algorithm. It is found that arbitrage can reduce the volatility and to some extent the mean of electricity prices in both markets when two markets with a similar distribution of prices are connected. It is also found that it is possible for interconnectors to generate considerable revenues without any consistent price differences between the connected markets. This shows that interconnectors between seemingly very similar electricity markets can be an attractive proposition for a profit-seeking investor.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1059.
Date of creation: 16 Nov 2010
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Web page: http://www.econ.cam.ac.uk/index.htm
Merchant interconnectors; electricity prices; price volatility; simulation; bootstrapping;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-CMP-2010-11-27 (Computational Economics)
- NEP-ENE-2010-11-27 (Energy Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- van der Weijde, Adriaan Hendrik & Hobbs, Benjamin F., 2012. "The economics of planning electricity transmission to accommodate renewables: Using two-stage optimisation to evaluate flexibility and the cost of disregarding uncertainty," Energy Economics, Elsevier, vol. 34(6), pages 2089-2101.
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