A0283
Title: A new stochastic model for electricity prices
Authors: Angelica Gianfreda - University of Modena and Reggio Emilia (Italy) [presenting]
Derek Bunn - London Business School (United Kingdom)
Abstract: The wide range of models needed to support the various short-term operations for electricity generation demonstrates the importance of accurate specifications for the uncertainty in market prices. This is becoming increasingly challenging, since hourly price densities for electricity exhibit a variety of shapes, with their characteristic features changing substantially within the day and evolving over time. Furthermore, the influx of renewable power, wind and solar in particular, has made these density shapes very weather dependent. We develop a general four-parameter stochastic model for hourly prices, in which the four moments of the density function are dynamically estimated as latent state variables and furthermore modelled as functions of several plausible exogenous drivers. This provides a transparent and credible model that is sufficiently flexible to capture the shape-shifting effects, particularly with respect to the wind and solar output variations causing dynamic switches in the upside and downside risks. Extensive testing on German wholesale price data, benchmarked against quantile regression and other models in out-of-sample backtesting, validated the approach and its analytical appeal.
