Modelling spikes in electricity prices

Ralf Becker, Stan Hurn, Vlad Pavlov

Research output: Contribution to journalArticlepeer-review

Abstract

During periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes therefore is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models that assume normality of the prices in each state, the model presented here uses a generalised beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes. © 2007 The Economic Society of Australia.
Original languageEnglish
Pages (from-to)371-382
Number of pages11
JournalEconomic Record
Volume83
Issue number263
DOIs
Publication statusPublished - Dec 2007

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