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Fundamental and Behavioural Drivers of Electricity Price Volatility

Author

Listed:
  • Karakatsani Nektaria V

    () (Regulatory Authority for Energy - Greece)

  • Bunn Derek W.

    () (London Business School)

Abstract

The stochastic properties of volatility in spot electricity prices are only partially understood and present substantial modelling challenges. This paper develops and applies three complementary modelling approaches in order to uncover its fundamental and behavioural drivers over time and across intra-day trading periods. First, intra-day prices are related to systematic components, including economic fundamentals, strategic and market design effects. Then, residual volatility is attributed to: i) regular, non-linear agent reactions to market fundamentals (covariates of heteroscedasticity), ii) the adaptation of price formation due to substantial agent learning (time-varying effects), and iii) the transient extreme pricing in periods of scarcity (regime-switching dynamics). We find that, i) GARCH effects diminish, when each of the above sources of volatility is accounted for, and ii) allowing for the time-varying responses of prices to fundamentals can yield more precise volatility estimates than an explicit GARCH specification.

Suggested Citation

  • Karakatsani Nektaria V & Bunn Derek W., 2010. "Fundamental and Behavioural Drivers of Electricity Price Volatility," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(4), pages 1-42, September.
  • Handle: RePEc:bpj:sndecm:v:14:y:2010:i:4:n:4
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    References listed on IDEAS

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    Cited by:

    1. Haugom, Erik & Ullrich, Carl J., 2012. "Forecasting spot price volatility using the short-term forward curve," Energy Economics, Elsevier, vol. 34(6), pages 1826-1833.
    2. Paraschiv, Florentina & Erni, David & Pietsch, Ralf, 2014. "The impact of renewable energies on EEX day-ahead electricity prices," Energy Policy, Elsevier, vol. 73(C), pages 196-210.
    3. Ketterer, Janina C., 2014. "The impact of wind power generation on the electricity price in Germany," Energy Economics, Elsevier, vol. 44(C), pages 270-280.
    4. Janczura, Joanna & Weron, Rafal, 2010. "Goodness-of-fit testing for regime-switching models," MPRA Paper 22871, University Library of Munich, Germany.
    5. Higgs, Helen & Lien, Gudbrand & Worthington, Andrew C., 2015. "Australian evidence on the role of interregional flows, production capacity, and generation mix in wholesale electricity prices and price volatility," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 172-181.
    6. Joanna Janczura & Rafał Weron, 2013. "Goodness-of-fit testing for the marginal distribution of regime-switching models with an application to electricity spot prices," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 97(3), pages 239-270, July.
    7. Joanna Janczura & Rafał Weron, 2012. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 96(3), pages 385-407, July.
    8. Zachmann, Georg, 2013. "A stochastic fuel switching model for electricity prices," Energy Economics, Elsevier, vol. 35(C), pages 5-13.
    9. Auer, Benjamin R., 2016. "How does Germany's green energy policy affect electricity market volatility? An application of conditional autoregressive range models," Energy Policy, Elsevier, vol. 98(C), pages 621-628.
    10. Kyritsis, Evangelos & Andersson, Jonas & Serletis, Apostolos, 2017. "Electricity prices, large-scale renewable integration, and policy implications," Energy Policy, Elsevier, vol. 101(C), pages 550-560.
    11. Angelica Gianfreda & Derek Bunn, 2018. "A Stochastic Latent Moment Model for Electricity Price Formation," BEMPS - Bozen Economics & Management Paper Series BEMPS46, Faculty of Economics and Management at the Free University of Bozen.
    12. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    13. repec:eee:energy:v:142:y:2018:i:c:p:1083-1103 is not listed on IDEAS
    14. O'Mahoney, Amy & Denny, Eleanor, 2013. "Electricity prices and generator behaviour in gross pool electricity markets," Energy Policy, Elsevier, vol. 63(C), pages 628-637.
    15. repec:dui:wpaper:1502 is not listed on IDEAS
    16. repec:eee:enepol:v:107:y:2017:i:c:p:323-336 is not listed on IDEAS
    17. Pape, Christian & Hagemann, Simon & Weber, Christoph, 2016. "Are fundamentals enough? Explaining price variations in the German day-ahead and intraday power market," Energy Economics, Elsevier, vol. 54(C), pages 376-387.

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