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Modelling Spikes in Electricity Prices

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  • RALF BECKER
  • STAN HURN
  • VLAD PAVLOV

Abstract

During periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes therefore is important for risk management. This paper builds a time‐varying‐probability Markov‐switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov‐switching models that assume normality of the prices in each state, the model presented here uses a generalised beta distribution to allow for the skewness in the distribution of electricity prices during high‐price episodes.

Suggested Citation

  • Ralf Becker & Stan Hurn & Vlad Pavlov, 2007. "Modelling Spikes in Electricity Prices," The Economic Record, The Economic Society of Australia, vol. 83(263), pages 371-382, December.
    • Handle: RePEc:bla:ecorec:v:83:y:2007:i:263:p:371-382
    DOI: 10.1111/j.1475-4932.2007.00427.x
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    References listed on IDEAS

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    3. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
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