Optimal Cross-Border Electricity Trading

Abstract

We show there exists a profitable cross-border trading strategy for an agent who trades electricity in the European electricity network. Data of the European markets are employed to show how electricity prices in all locations of the network are affected by the flow of power between any two locations that trade power between them. The optimal cross-border trading strategy is derived via the explicit solution of a non-trivial stochastic control problem in which prices at different locations are co-integrated and trading affects prices in all locations of the network.

Keywords: stochastic optimal control, electricity interconnector, co-integration, cross-border price impact, electricity network