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An Empirically Based Model of the Supply Schedule in Day-Ahead Electricity Markets

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Sandro Sapio

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Abstract

The first part of this paper establishes some new pieces of evidence on the dynamics of prices and volumes in wholesale electricity day-ahead markets (NordPool, APX, Powernext). The growth of prices is more strongly autocorrelated than the growth of volumes; it is more more heavy-tailed; and its conditional standard deviation decays like the reciprocal of the price level (1/P scaling). In the second part of the paper, it is shown that a linear supply function with stochastic intercept and constant slope suffices to explain the 1/P scaling. Furthermore, this model allows to decompose price fluctuations in an exogenous demand effect and a strategically-driven supply effect. In light of this model, the heavier tails of price growth and its stronger autocorrelation structure are due to persistent and intermittent strategic moves by suppliers, related to expected demand growth.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2006/12.

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Date of creation: 08 May 2006
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Handle: RePEc:ssa:lemwps:2006/12

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Related research
Keywords: Electricity Markets; Supply Curve; Subbotin Distribution; Fat Tails; Scaling; Demand Effect; Supply Effect.;

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  1. Byström, Hans, 2001. "Extreme Value Theory and Extremely Large Electricity Price Changes," Working Papers 2001:19, Lund University, Department of Economics.
  2. Francis X. Diebold & Lee E. Ohanian & Jeremy Berkowitz, 1997. "Dynamic equilibrium economies: a framework for comparing models and data," Finance and Economics Discussion Series 1997-23, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Green, Richard, 2006. "Market power mitigation in the UK power market," Utilities Policy, Elsevier, vol. 14(2), pages 76-89, June. [Downloadable!] (restricted)
  4. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July. [Downloadable!] (restricted)
  5. Andrew C. Worthington & Adam Kay-Spratley & Helen Higgs, 2002. "Transmission of prices and price volatility in Australian electricity spot markets: A multivariate GARCH analysis," School of Economics and Finance Discussion Papers and Working Papers Series 114, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  6. Francis Longstaff & Ashley Wang, 2002. "Electricity Forward Prices: A High-Frequency Empirical Analysis," University of California at Los Angeles, Anderson Graduate School of Management 1046, Anderson Graduate School of Management, UCLA. [Downloadable!]
  7. Newbery, D., 2002. "Issues and Options for Restructuring Electricity Supply Industries," Cambridge Working Papers in Economics 0210, Faculty of Economics, University of Cambridge. [Downloadable!]
  8. 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)
  9. Youngki Lee & Luis A. N. Amaral & David Canning & Martin Meyer & H. Eugene Stanley, 1998. "Universal features in the growth dynamics of complex organizations," Quantitative Finance Papers cond-mat/9804100, arXiv.org. [Downloadable!]
  10. Giulio Bottazzi & Angelo Secchi, 2005. "Explaining the Distribution of Firms Growth Rates," LEM Papers Series 2005/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
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  11. Joskow, Paul L, 1996. "Introducing Competition into Regulated Network Industries: From Hierarchies to Markets in Electricity," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 341-82.
  12. Blumsack, Seth & Perekhodtsev, Dmitri & Lave, Lester B., 2002. "Market Power in Deregulated Wholesale Electricity Markets: Issues in Measurement and the Cost of Mitigation," The Electricity Journal, Elsevier, vol. 15(9), pages 11-24, November. [Downloadable!] (restricted)
  13. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Giulio Bottazzi & Sandro Sapio & Angelo Secchi, 2004. "Some Statistical Investigations on the Nature and Dynamics of Electricity Prices," LEM Papers Series 2004/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  15. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May. [Downloadable!] (restricted)
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  16. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September. [Downloadable!] (restricted)
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