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A spot-forward model for electricity prices with regime shifts

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  • Paraschiv, Florentina
  • Fleten, Stein-Erik
  • Schürle, Michael

Abstract

We propose a novel regime-switching approach for electricity prices in which simulated and forecasted prices are consistent with currently observed forward prices. Additionally, the model is able to reproduce spikes and negative prices. We distinguish between a base regime as well as upper and lower spike regimes. We derive hourly price forward curves for EEX Phelix, and together with historical hourly spot prices, historical hourly price forward curves are the basis for model calibration. The model can be used for simulation and forecasting of electricity spot prices over short- and medium-term horizons. Tests imply that it shows a better performance than classical time series approaches.

Suggested Citation

  • Paraschiv, Florentina & Fleten, Stein-Erik & Schürle, Michael, 2015. "A spot-forward model for electricity prices with regime shifts," Energy Economics, Elsevier, vol. 47(C), pages 142-153.
    • Handle: RePEc:eee:eneeco:v:47:y:2015:i:c:p:142-153
    DOI: 10.1016/j.eneco.2014.11.003
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    More about this item

    Keywords

    Electricity prices; Regime-switching model; Negative prices; Spikes; Price forward curves;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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