Fundamental Drivers of Electricity Prices in the Pacific Northwest

Chi-Keung Woo, Ira Horowitz, Nate Toyama, Arne Olson, Aaron Lai and Ray Wan
Additional contact information
Ira Horowitz: Decision and Information Sciences, Warrington College of Business Administration, University of Florida, Gainesville, FL 32611-7169, USA and School of Accounting and Finance, Hong Kong Polytechnic University, Hung Hom, Hong Kong
Nate Toyama: Sacramento Municipal Utilities District, 6201 S Street, Sacramento, CA 95817, USA
Arne Olson: Energy and Environmental Economics Inc., 101 Montgomery Street, Suite 1600, San Francisco, CA 94111, USA
Aaron Lai: ATM/eCommerce Analytics, Bank of America, 1755 Grant Street, 4th Floor, Concord, CA 94520, USA
Ray Wan: InfoAtlas, Inc., 1441 Franklin Street, Suite 204, Oakland, CA 94612, USA

Chapter 15 in Advances in Quantitative Analysis of Finance and Accounting, 2007, pp 299-323 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe estimate an AR(1)/GARCH(1, 1) model that shows the impact of natural-gas prices, hydro conditions, and temperatures on wholesale on-peak electricity prices at the Mid-Columbia (Mid-C) trading hub in the Pacific Northwest of the United States. After controlling for the effects of these three factors, prices are seen to exhibit a weak seasonal pattern, but a strong day-of-week pattern. It is also shown that price spikes can persist for several days. Finally, in support of the GARCH hypothesis, Mid-C prices are seen to have a time-dependent variance that primarily moves with natural-gas prices, and that large price variances tend to persist. Thus, even though buyers might cross hedge using natural-gas futures and temperature-based weather futures, the effectiveness of any hedge is compromised by randomness in hydro conditions. To be sure, a buyer can eliminate the electricity price risk by entering into a forward contract, but only at the expense of what is likely to be a large risk premium embodied in the forward price.

Keywords: Monte Carlo Simulations; REIT; IPO; Fractional Integration; Seasonality; Long Memory; Macroeconomic Shocks; VAR; Interest Rates (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (9)

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