Fundamental pricing laws and long memory effects in the day-ahead power market

Nikolaos S. Thomaidis and Pandelis N. Biskas

Energy Economics, 2021, vol. 100, issue C

Abstract: We apply linear and nonlinear panel models to investigate fundamental pricing laws in the Greek day-ahead electricity market. We link the persistence behaviour and other dynamic properties of electricity price trajectories to an extended array of fundamental variables reflecting market conditions and the price course of energy commodities in global markets. Assuming that the dynamics of the intraday power pricing curve is adequately specified within a panel modelling framework with long memory and common unobserved stochastic effects, we are able to provide consistent estimates of price responsiveness to the main fundamental drivers and thus avoid biases induced by other popular modelling approaches. We also device a panel variant of the standard smooth-transition regression model to investigate regime switching effects in the price responsiveness mechanism. Empirical results suggest that Greek day-ahead electricity market prices respond significantly to hour-specific (load, marginal generation capacity) and global (Brent price, emission allowance rights cost) fundamental variables. In some intraday power delivery zones, these covariates are in a fractional cointegrating relationship with electricity prices being responsible for their drifting behaviour. The strength and type of cointegration changes across intraday trading periods in response to market conditions. The results of the nonlinear model demonstrate the ineffectiveness of linear model designs (either univariate or panel) to accurately estimate the levels of price risk and associate it with changes in the market climate.

Keywords: Day-ahead electricity market; Interactive fixed-effects panel model; Long memory; Fractional cointegration; Panel smooth-transition regression; Fundamental power pricing (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:100:y:2021:i:c:s014098832100116x

DOI: 10.1016/j.eneco.2021.105211

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