Behavior of power prices: implications for the valuation and hedging of financial contracts

Karan Bhanot

Journal of Risk

Abstract: ABSTRACT This paper contains an empirical analysis of electric power prices using data from 12 regional markets. A central feature of the paper is the explicit recognition that it is not possible to store power or carry a negative inventory. The author's objective is to characterize and explain the high degree of autocorrelation and seasonality in power prices and address salient issues that are pertinent for the valuation and hedging of power-based financial contracts. It is shown that price behavior changes with each regional market, so that a firm that seeks to value or hedge power-based contracts must use instruments from the region in which it operates.

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