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Modelling Spikes in Electricity Prices *
Author(s) -
BECKER RALF,
HURN STAN,
PAVLOV VLAD
Publication year - 2007
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2007.00427.x
Subject(s) - electricity , skewness , econometrics , electricity market , economics , markov chain , normality , electricity price , distribution (mathematics) , microeconomics , statistics , mathematics , mathematical analysis , electrical engineering , engineering
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 generalised beta distribution to allow for the skewness in the distribution of electricity prices during high‐price episodes.