Prediction of Extreme Price Occurrences in the German Day-ahead Electricity Market

Lars Ivar Hagfors (), Hilde Horthe Kamperud , Florentina Paraschiv, Marcel Prokopczuk (), Alma Sator and Sjur Westgaard

No 1622, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Understanding the mechanisms that drive extreme negative and positive prices in day-ahead electricity prices is crucial for managing risk and market design. In this paper, we consider the problem of understanding how fundamental drivers impact the probability of extreme price occurrences in the German day-ahead electricity market. We develop models using fundamental variables to predict the probability of extreme prices. The dynamics of negative prices and positive price spikes differ greatly. Positive spikes are related to high demand, low supply, and high prices the previous days, and mainly occur during the morning and afternoon peak hours. Negative prices occur mainly during the night, and are closely related to low demand combined with high wind production levels. Furthermore, we do a closer analysis of how renewable energy sources, hereby photovoltaic and wind power, impact the probability of negative prices and positive spikes. The models confirm that extremely high and negative prices have different drivers, and that wind power is particularly important in relation to negative price occurrences. The models capture the main drivers of both positive and negative extreme price occurrences, and perform well with respect to accurately forecasting the probability with high levels of confidence. Our results suggests that probability models are well suited to aid in risk management for market participants in day-ahead electricity markets.

Keywords: Energy Markets; Fundamental Analysis; Spikes; EPEX (search for similar items in EconPapers)
Pages: 28 pages
Date: 2016-07
New Economics Papers: this item is included in nep-ene, nep-for and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Prediction of extreme price occurrences in the German day-ahead electricity market (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2016:22

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