Stochastic Behaviour of the Electricity Bid Stack: From Fundamental Drivers to Power Prices

Abstract

We develop a fundamental model for spot electricity prices, based on stochastic processes for underlying factors (fuel prices, power demand and generation capacity availability), as well as a parametric form for the bid stack function which maps these price drivers to the power price. Using observed bid data, we find high correlations between the movements of bids and the corresponding fuel prices. We fit the model to the PJM and New England markets in the US, and discuss its performance, in terms of capturing key properties of simulated price trajectories, as well as comparing implied forward prices with observed data.

Keywords: electricity, bid stack, fundamental, margin, demand, natural gas

JEL Classification: G12