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Practical stochastic modelling of electricity prices

Author

Listed:
  • Michel Culot

    (Electrabel SA - Electrabel SA)

  • Valérie Goffin

    (FUNDP - UNamur - Université de Namur [Namur])

  • Steve Lawford

    (LEEA - ENAC - Laboratoire d'Economie et d'Econométrie de l'Aérien - ENAC - Ecole Nationale de l'Aviation Civile)

  • Sébastien de Meten

    (Electrabel SA - Electrabel SA)

  • Yves Smeers

    (Department of Mathematical Engineering - UCL - Université Catholique de Louvain = Catholic University of Louvain)

Abstract

We develop a flexible multifactor stochastic model with Markov regime-switching spikes, for daily spot and forward electricity. The model captures various stylized features of power prices, including mean reversion and seasonal patterns, and short- lived spikes. Parameters are estimated through a practical two-step procedure, that combines pre-calibration of deterministic elements and spikes, and state-space estimation of diffusive factors. We use several results on affine jump diffusions to combine the spike and diffusive components, and to provide convenient closed-form solutions for important power derivatives. We also propose a simple nonparametric model for hourly spot prices, based on hourly profile sampling from historical data. This model can reproduce complicated intraday patterns, and enables fast numerical pricing of hourly options. We illustrate the performance of the daily and hourly models using data from the Amsterdam Power Exchange.

Suggested Citation

  • Michel Culot & Valérie Goffin & Steve Lawford & Sébastien de Meten & Yves Smeers, 2013. "Practical stochastic modelling of electricity prices," Post-Print hal-01021603, HAL.
    • Handle: RePEc:hal:journl:hal-01021603
    Note: View the original document on HAL open archive server: https://enac.hal.science/hal-01021603
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    References listed on IDEAS

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    3. Ioannidis, Filippos & Kosmidou, Kyriaki & Savva, Christos & Theodossiou, Panayiotis, 2021. "Electricity pricing using a periodic GARCH model with conditional skewness and kurtosis components," Energy Economics, Elsevier, vol. 95(C).
    4. Houda Ghamlouch & Mitra Fouladirad & Antoine Grall, 2019. "The use of real option in condition-based maintenance scheduling for wind turbines with production and deterioration uncertainties," Post-Print hal-02365402, HAL.
    5. Prabakaran, Sellamuthu & Garcia, Isabel C. & Mora, Jose U., 2020. "A temperature stochastic model for option pricing and its impacts on the electricity market," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 58-77.
    6. Ghamlouch, Houda & Fouladirad, Mitra & Grall, Antoine, 2019. "The use of real option in condition-based maintenance scheduling for wind turbines with production and deterioration uncertainties," Reliability Engineering and System Safety, Elsevier, vol. 188(C), pages 614-623.

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