Power Spot Price Models with negative Prices

Stefan Schneider and Stefan Schneider

MPRA Paper from University Library of Munich, Germany

Abstract: Negative prices for electricity are a novelty in European power markets. At the German EEX spot market negative hourly prices have since occurred frequently, down to values as extreme as minus several hundred €/MWh. However, in some non-European markets as USA, Australia and Canada, negative prices are a characteristic for a longer period already. Negative prices are in fact natural for electricity spot trading: plant flexibility is limited and costly, thus, incurring a negative price for an hour can nevertheless be economically optimal overall. Negative prices pose a basic problem to stochastic price modelling: going from prices to log-prices is not possible. So far, this has been dealt with by “workarounds”. However, here a thorough approach is advocated, based on the area hyperbolic sine transformation. The transformation is applied to spot modelling of the German EEX, the ERCOT West Texas market and the exemplary valuation of an option. It is concluded that the area hyperbolic sine transform is well and naturally suited as a starting point for modelling negative power prices. It can be integrated in common stochastic price models without adding much complexity. Moreover, this transformation might be in general more appropriate for power prices than the log transformation, considering fundamentals of power price formation. Eventually, a thorough treatment of negative prices is indispensable since they significantly affect business.

Keywords: energy spot price modeling; electricity spot markets; negative prices; EEX (search for similar items in EconPapers)
JEL-codes: C46 C5 C51 G13 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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