Modeling Spikes in Electricity Prices

12 Pages Posted: 5 Jan 2008

See all articles by Ralf Becker

Ralf Becker

University of Manchester

Stan Hurn

Queensland University of Technology - School of Economics and Finance

Vlad Pavlov

Queensland University of Technology - School of Economics and Finance

Abstract

During periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes therefore is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models that assume normality of the prices in each state, the model presented here uses a generalized beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes.

Suggested Citation

Becker, Ralf and Hurn, Stan and Pavlov, Vlad, Modeling Spikes in Electricity Prices. Economic Record, Vol. 83, Issue 263, pp. 371-382, December 2007, Available at SSRN: https://ssrn.com/abstract=1080367 or http://dx.doi.org/10.1111/j.1475-4932.2007.00427.x

Ralf Becker

University of Manchester ( email )

School of Social Sciences
Manchester M13 9PL
United Kingdom

Stan Hurn

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia
+61 7 3864 5066 (Phone)
+61 7 3864 1500 (Fax)

Vlad Pavlov

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia
+61 7 313 82704 (Phone)
+61 7 313 81500 (Fax)

HOME PAGE: http://www.qut.edu.au/ph_server_query.do

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