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Fundamental Drivers of Electricity Prices in the Pacific Northwest

In: Advances In Quantitative Analysis Of Finance And Accounting

Author

Listed:
  • Chi-Keung Woo

    (Energy and Environmental Economics Inc., 101 Montgomery Street, Suite 1600, San Francisco, CA 94111, USA and Hong Kong Energy Studies Centre, Hong Kong Baptist University, Kowloon Tong, Hong Kong)

  • Ira Horowitz

    (Decision and Information Sciences, Warrington College of Business Administration, University of Florida, Gainesville, FL 32611-7169, USA and School of Accounting and Finance, Hong Kong Polytechnic University, Hung Hom, Hong Kong)

  • Nate Toyama

    (Sacramento Municipal Utilities District, 6201 S Street, Sacramento, CA 95817, USA)

  • Arne Olson

    (Energy and Environmental Economics Inc., 101 Montgomery Street, Suite 1600, San Francisco, CA 94111, USA)

  • Aaron Lai

    (ATM/eCommerce Analytics, Bank of America, 1755 Grant Street, 4th Floor, Concord, CA 94520, USA)

  • Ray Wan

    (InfoAtlas, Inc., 1441 Franklin Street, Suite 204, Oakland, CA 94612, USA)

Abstract

We estimate an AR(1)/GARCH(1, 1) model that shows the impact of natural-gas prices, hydro conditions, and temperatures on wholesale on-peak electricity prices at the Mid-Columbia (Mid-C) trading hub in the Pacific Northwest of the United States. After controlling for the effects of these three factors, prices are seen to exhibit a weak seasonal pattern, but a strong day-of-week pattern. It is also shown that price spikes can persist for several days. Finally, in support of the GARCH hypothesis, Mid-C prices are seen to have a time-dependent variance that primarily moves with natural-gas prices, and that large price variances tend to persist. Thus, even though buyers might cross hedge using natural-gas futures and temperature-based weather futures, the effectiveness of any hedge is compromised by randomness in hydro conditions. To be sure, a buyer can eliminate the electricity price risk by entering into a forward contract, but only at the expense of what is likely to be a large risk premium embodied in the forward price.

Suggested Citation

  • Chi-Keung Woo & Ira Horowitz & Nate Toyama & Arne Olson & Aaron Lai & Ray Wan, 2007. "Fundamental Drivers of Electricity Prices in the Pacific Northwest," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting, chapter 15, pages 299-323, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812772213_0015
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    Citations

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    Cited by:

    1. Moore, J. & Woo, C.K. & Horii, B. & Price, S. & Olson, A., 2010. "Estimating the option value of a non-firm electricity tariff," Energy, Elsevier, vol. 35(4), pages 1609-1614.
    2. Woo, C.K. & Kollman, E. & Orans, R. & Price, S. & Horii, B., 2008. "Now that California has AMI, what can the state do with it?," Energy Policy, Elsevier, vol. 36(4), pages 1366-1374, April.
    3. Woo, C.K. & Zarnikau, J. & Moore, J. & Horowitz, I., 2011. "Wind generation and zonal-market price divergence: Evidence from Texas," Energy Policy, Elsevier, vol. 39(7), pages 3928-3938, July.
    4. Woo, C.K. & Shiu, A. & Liu, Y. & Luo, X. & Zarnikau, J., 2018. "Consumption effects of an electricity decarbonization policy: Hong Kong," Energy, Elsevier, vol. 144(C), pages 887-902.
    5. Woo, C.K. & Horowitz, I. & Moore, J. & Pacheco, A., 2011. "The impact of wind generation on the electricity spot-market price level and variance: The Texas experience," Energy Policy, Elsevier, vol. 39(7), pages 3939-3944, July.
    6. Woo, C.K. & Moore, J. & Schneiderman, B. & Ho, T. & Olson, A. & Alagappan, L. & Chawla, K. & Toyama, N. & Zarnikau, J., 2016. "Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 299-312.
    7. Chi-Keung Woo, Ira Horowitz, Jay Zarnikau, Jack Moore, Brendan Schneiderman, Tony Ho, and Eric Leung, 2016. "What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    8. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    9. Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.

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