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Modelling Electricity Prices with Forward Looking Capacity Constraints

Author

Listed:
  • Alvaro Cartea
  • Marcelo Figueroa
  • Helyette Geman

Abstract

We present a spot price model for wholesale electricity prices which incorporates forward looking information that is available to all market players. We focus on information that measures the extent to which the capacity of the England and Wales generation park will be constrained over the next 52 weeks. We propose a measure of 'tight market conditions', based on capacity constraints, which identifies the weeks of the year when price spikes are more likely to occur. We show that the incorporation of this type of forward looking information, not uncommon in electricity markets, improves the modelling of spikes (timing and magnitude) and the different speeds of mean reversion.

Suggested Citation

  • Alvaro Cartea & Marcelo Figueroa & Helyette Geman, 2009. "Modelling Electricity Prices with Forward Looking Capacity Constraints," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(2), pages 103-122.
  • Handle: RePEc:taf:apmtfi:v:16:y:2009:i:2:p:103-122 DOI: 10.1080/13504860802351164
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Rafał Weron, 2001. "Levy-Stable Distributions Revisited: Tail Index> 2does Not Exclude The Levy-Stable Regime," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., pages 209-223.
    2. Clements, A.E. & Hurn, A.S. & Li, Z., 2016. "Strategic bidding and rebidding in electricity markets," Energy Economics, Elsevier, vol. 59(C), pages 24-36.
    3. Benth, Fred Espen & Biegler-König, Richard & Kiesel, Rüdiger, 2013. "An empirical study of the information premium on electricity markets," Energy Economics, Elsevier, vol. 36(C), pages 55-77.
    4. Coulon, Michael & Powell, Warren B. & Sircar, Ronnie, 2013. "A model for hedging load and price risk in the Texas electricity market," Energy Economics, Elsevier, vol. 40(C), pages 976-988.
    5. Rafal Weron, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," HSC Research Reports HSC/14/07, Hugo Steinhaus Center, Wroclaw University of Technology.
    6. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2015. "Electricity derivatives pricing with forward-looking information," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 34-57.
    7. Ke Du, 2013. "Commodity Derivative Pricing Under the Benchmark Approach," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2.
    8. Cartea, Álvaro & Villaplana, Pablo, 2008. "Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2502-2519, December.
    9. Nowotarski, Jakub & Tomczyk, Jakub & Weron, Rafał, 2013. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," Energy Economics, Elsevier, vol. 39(C), pages 13-27.
    10. Carlo Lucheroni, 2012. "A hybrid SETARX model for spikes in tight electricity markets," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 1, pages 13-49.
    11. Janczura, Joanna & Weron, Rafal, 2010. "An empirical comparison of alternate regime-switching models for electricity spot prices," Energy Economics, Elsevier, vol. 32(5), pages 1059-1073, September.
    12. Rene Carmona & Michael Coulon & Daniel Schwarz, 2012. "Electricity price modeling and asset valuation: a multi-fuel structural approach," Papers 1205.2299, arXiv.org.
    13. Pawel Maryniak & Rafal Weron, 2014. "Forecasting the occurrence of electricity price spikes in the UK power market," HSC Research Reports HSC/14/11, Hugo Steinhaus Center, Wroclaw University of Technology.
    14. Stronzik, Marcus & Rammerstorfer, Margarethe & Neumann, Anne, 2009. "Does the European natural gas market pass the competitive benchmark of the theory of storage? Indirect tests for three major trading points," Energy Policy, Elsevier, vol. 37(12), pages 5432-5439, December.
    15. 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.
    16. Lindström, Erik & Norén, Vicke & Madsen, Henrik, 2015. "Consumption management in the Nord Pool region: A stability analysis," Applied Energy, Elsevier, pages 239-246.

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