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Power Spot Price Models with negative Prices

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  • Schneider, Stefan
  • Schneider, Stefan

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.

Suggested Citation

  • Schneider, Stefan & Schneider, Stefan, 2010. "Power Spot Price Models with negative Prices," MPRA Paper 29958, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:29958
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    References listed on IDEAS

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    1. Rafał Weron, 2009. "Heavy-tails and regime-switching in electricity prices," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(3), pages 457-473, July.
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    Cited by:

    1. Lars Ivar Hagfors & Hilde Hørthe Kamperud & Florentina Paraschiv & Marcel Prokopczuk & Alma Sator & Sjur Westgaard, 2016. "Prediction of extreme price occurrences in the German day-ahead electricity market," Quantitative Finance, Taylor & Francis Journals, vol. 16(12), pages 1929-1948, December.
    2. 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.
    3. Almut E. D. Veraart & Luitgard A. M. Veraart, 2012. "Modelling electricity day–ahead prices by multivariate Lévy semistationary processes," CREATES Research Papers 2012-13, Department of Economics and Business Economics, Aarhus University.
    4. Arvesen, Ø. & Medbø, V. & Fleten, S.-E. & Tomasgard, A. & Westgaard, S., 2013. "Linepack storage valuation under price uncertainty," Energy, Elsevier, vol. 52(C), pages 155-164.
    5. Michel Culot & Valérie Goffin & Steve Lawford & Sébastien de Meten & Yves Smeers, 2013. "Practical stochastic modelling of electricity prices," Post-Print hal-01021603, HAL.

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    More about this item

    Keywords

    energy spot price modeling; electricity spot markets; negative prices; EEX;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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