A Stochastic Latent Moment Model for Electricity Price Formation

Angelica Gianfreda and Derek Bunn ()
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Derek Bunn: London Business School, Energy Markets Group

No BEMPS46, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: The wide range of models needed to support the various short-term operations for electricity generation demonstrates the importance of accurate specifications for the uncertainty in market prices. This is becoming increasingly challenging, since electricity hourly price densities exhibit a variety of shapes, with their characteristic features changing substantially within the day and over time, and the in ux of renewable power, wind and solar in particular, has amplified these effects. A general-purpose, analytically tractable representation of the stochastic price formation process would have considerable value for operations control and trading, but existing empirical approaches or the application of standard density functions are unsatisfactory. We develop a general four parameter stochastic model for hourly prices, in which the four moments of the density function are dynamically estimated as latent state variables and furthermore modelled as functions of several plausible exogenous drivers. This provides a transparent and credible model that is suffciently exible to capture the shape-shifting effects, particularly with respect to the wind and solar output variations causing dynamic switches in the upside and downside risks. Extensive testing on German wholesale price data, benchmarked against quantile regression and other models in out-of-sample backtesting, validated the approach and its analytical appeal.

Keywords: Electricity Prices; Density Estimation; Skewness; Quantiles; Risk (search for similar items in EconPapers)
JEL-codes: C01 C21 C22 C32 C53 Q41 Q47 (search for similar items in EconPapers)
Pages: [69 page]
Date: 2018-01
New Economics Papers: this item is included in nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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