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Power Spot Price Models with negative Prices

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  • Schneider, Stefan
  • Schneider, Stefan
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    Abstract

    Negative prices for electricity are a novelty in European power markets. At the German EEX spot market negative hourly prices have since occurred frequently, down to values as extreme as minus several hundred €/MWh. However, in some non-European markets as USA, Australia and Canada, negative prices are a characteristic for a longer period already. Negative prices are in fact natural for electricity spot trading: plant flexibility is limited and costly, thus, incurring a negative price for an hour can nevertheless be economically optimal overall. Negative prices pose a basic problem to stochastic price modelling: going from prices to log-prices is not possible. So far, this has been dealt with by “workarounds”. However, here a thorough approach is advocated, based on the area hyperbolic sine transformation. The transformation is applied to spot modelling of the German EEX, the ERCOT West Texas market and the exemplary valuation of an option. It is concluded that the area hyperbolic sine transform is well and naturally suited as a starting point for modelling negative power prices. It can be integrated in common stochastic price models without adding much complexity. Moreover, this transformation might be in general more appropriate for power prices than the log transformation, considering fundamentals of power price formation. Eventually, a thorough treatment of negative prices is indispensable since they significantly affect business.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29958.

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    Date of creation: Dec 2010
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    Handle: RePEc:pra:mprapa:29958

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    Keywords: energy spot price modeling; electricity spot markets; negative prices; EEX;

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    1. Weron, Rafal, 2008. "Heavy-tails and regime-switching in electricity prices," MPRA Paper 10424, University Library of Munich, Germany.
    2. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    3. Damiano Brigo & Fabio Mercurio & Giulio Sartorelli, 2003. "Alternative asset-price dynamics and volatility smile," Quantitative Finance, Taylor & Francis Journals, vol. 3(3), pages 173-183.
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    Cited by:
    1. Arvesen, Øystein & Medbø, Vegard & Fleten, Stein-Erik & Tomasgard, Asgeir & Westgaard, Sjur, 2012. "Linepack storage valuation under price uncertainty," MPRA Paper 43270, University Library of Munich, Germany.
    2. Almut E. D. Veraart & Luitgard A. M. Veraart, 2012. "Modelling electricity day–ahead prices by multivariate Lévy semistationary processes," CREATES Research Papers 2012-13, School of Economics and Management, University of Aarhus.
    3. Keles, Dogan & Genoese, Massimo & Möst, Dominik & Fichtner, Wolf, 2012. "Comparison of extended mean-reversion and time series models for electricity spot price simulation considering negative prices," Energy Economics, Elsevier, vol. 34(4), pages 1012-1032.

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