Understanding the Fine Structure of Electricity Prices

Hélyette Geman and Andrea Roncoroni
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Hélyette Geman: Birkbeck, University of London and ESSEC Business School
Andrea Roncoroni: ESSEC Business School

Journal of Business, 2006, vol. 79, issue 3, pages 1225-1262

Abstract: This paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a "jump-reversion" component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture—for the first time to our knowledge—both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major U.S. power markets.

Date: 2006
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