Common Unobserved Determinants of Intraday Electricity Prices

Forthcoming in The Energy Journal, Vol. 40, SI1 (DOI 10.5547/01956574.40.SI1.ntho). Copyright © 2019 by the IAEE

Posted: 22 Feb 2018 Last revised: 8 Feb 2019

See all articles by Nikolaos S. Thomaidis

Nikolaos S. Thomaidis

School of Economics, Aristotle University of Thessaloniki

Gordon H. Dash

University of Rhode Island

Nina Kajiji

University of Rhode Island

Date Written: February 13, 2018

Abstract

Electricity prices are known to have special statistical properties, where long-memory effects, varying-level periodicities, cross-dependencies and other exogenous influences often work together to form a complex data-generating process. The need for accurately representing all these features typically leads us to complex parametrizations, which are prone to numerical instabilities, overfitting and poor transparency. A natural counterpart to an overparameterized model is accomplished by the use of factor decomposition techniques to simplify the modeling process by implementing a more compact factor structure for the cross-section of electricity prices. In this paper, we exploit multi-level factor modelling techniques to unravel systematic unobserved determinants of the intraday and interzonal price curve dynamics. These techniques make an explicit separation of global drivers from region-specific common factors, thereby facilitating the identification of the actual sources of co-variability. Our findings on the Pennsylvania-New Jersey-Maryland (PJM) interconnection confirm the hypothesis that the common unobserved determinants of power prices in this interconnection obey a block structure, some of which affect different segments of our panel. We argue that a multi-level factor approach offers a more systematic and transparent representation of intertemporal and cross-sectional patterns in PJM electricity prices compared to alternative brute-force VARMAX parametrizations and the ``flat" factor models, which are often put forward in the literature as viable modelling alternatives.

Keywords: Multi-level factor models, power price dynamics, day-ahead electricity markets, PJM interconnection

Suggested Citation

Thomaidis, Nikolaos S. and Dash, Gordon H. and Kajiji, Nina, Common Unobserved Determinants of Intraday Electricity Prices (February 13, 2018). Forthcoming in The Energy Journal, Vol. 40, SI1 (DOI 10.5547/01956574.40.SI1.ntho). Copyright © 2019 by the IAEE , Available at SSRN: https://ssrn.com/abstract=3123059 or http://dx.doi.org/10.2139/ssrn.3123059

Nikolaos S. Thomaidis (Contact Author)

School of Economics, Aristotle University of Thessaloniki

OPE building, University Campus
Thessaloniki, 54124
Greece

Gordon H. Dash

University of Rhode Island ( email )

316 Ballentine Hall
College of Business
Kingston, RI 02881
United States
4012417730 (Phone)

HOME PAGE: http://www.ghdash.net

Nina Kajiji

University of Rhode Island ( email )

Quinn Hall
55 Lower College Rd.
Kingston, RI 02881
United States

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