Modelling of Fuel- and Energy-Switching Prices by Mean-Reverting Processes and Their Applications to Alberta Energy Markets

Weiliang Lu, Alexis Arrigoni, Anatoliy Swishchuk and Stéphane Goutte
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Weiliang Lu: Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada
Alexis Arrigoni: Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada
Anatoliy Swishchuk: Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada

Mathematics, 2021, vol. 9, issue 7, 1-24

Abstract: This paper introduces a fuel-switching price to the Alberta market, which is designed for encouraging power plant companies to switch from coal to natural gas when they produce electricity; this has been successfully applied to the European market. Moreover, we consider an energy-switching price which considers power switch from natural gas to wind. We modeled these two prices using five mean reverting processes including a Regime-switching processes, Lévy-driven Ornstein–Uhlenbeck process and Inhomogeneous Geometric Brownian Motion, and estimate them based on multiple procedures such as Maximum likelihood estimation and Expectation-Maximization algorithm. Finally, this paper proves previous results applied to the Albertan Market where the jump modeling technique is needed when modeling fuel-switching data. In addition, it not only gives promising conclusions on the necessity of introducing Regime-switching models to the fuel-switching data, but also shows that the Regime-switching model is better fitted to the data.

Keywords: alberta energy markets; mean-reverting stochastic processes; carbon pricing; renewable energies; fuel-switching; levy process; regime-switching (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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