Hedging power price risk is a crucial task in competitive electricity markets. The definition of risk management strategies as well as the pricing process of power derivatives require that the fine behavior of power prices is well understood. Suitable models must reproduce therefore the main features of market prices, such as the alternance of stable and turbulent periods in which jumps and spikes can be observed. From this point of view, regime-switching models seem to be good candidates. In this paper we propose an equilibrium methodology to derive electricity prices dynamics from the interplay between supply and demand in a stochastic environment. Assuming that the supply function is described by an exponential function where the argument is a two-state Markov process, we derive a regime switching dynamics of power prices in which regime switches are induced by transitions between Markov states. The empirical analysis, performed on the Victoria power market and on the ERCOT market, confirms that the proposed approach seems quite flexible and capable of incorporating the main features of power prices time-series, thus reproducing the first four moments of log-returns empirical distributions in a satisfactory way.
Random prices and risk in electricity markets
CANANA', Lucianna;
2011-01-01
Abstract
Hedging power price risk is a crucial task in competitive electricity markets. The definition of risk management strategies as well as the pricing process of power derivatives require that the fine behavior of power prices is well understood. Suitable models must reproduce therefore the main features of market prices, such as the alternance of stable and turbulent periods in which jumps and spikes can be observed. From this point of view, regime-switching models seem to be good candidates. In this paper we propose an equilibrium methodology to derive electricity prices dynamics from the interplay between supply and demand in a stochastic environment. Assuming that the supply function is described by an exponential function where the argument is a two-state Markov process, we derive a regime switching dynamics of power prices in which regime switches are induced by transitions between Markov states. The empirical analysis, performed on the Victoria power market and on the ERCOT market, confirms that the proposed approach seems quite flexible and capable of incorporating the main features of power prices time-series, thus reproducing the first four moments of log-returns empirical distributions in a satisfactory way.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
