Modelling Electricity Prices with Forward Looking Capacity Constraints
University College London
Marcelo G. Figueroa
University of London - Birkbeck College
University of London, Birkbeck College - School of Economics, Mathematics and Statistics
January 16, 2008
Applied Mathematical Finance, Volume 16, Issue 2, 2009, p 103-122
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 the electricity markets, improves the modeling of spikes (timing and magnitude) and the different speeds of mean reversion.
Number of Pages in PDF File: 36
Keywords: capacity constraints, mean reversion, electricity, indicated demand, electricity indicated generation, regime switching model
JEL Classification: G12, G13working papers series
Date posted: January 26, 2008 ; Last revised: March 11, 2013
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