Publication: Modelling electricity prices with forward looking capacity constraints
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2008-01-16
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Abstract
We present a spot price model for wholesale electricity prices which incorporates
forward looking information that is available to all market players.
We focus on information that measures the extent to which the capacity of
the England and Wales generation park will be constrained over the next 52
weeks. We propose a measure of ‘tight market conditions’, based on capacity
constraints, which identifies the weeks of the year when price spikes are more
likely to occur. We show that the incorporation of this type of forward looking
information, not uncommon in the electricity markets, improves the modeling
of spikes (timing and magnitude) and the different speeds of mean reversion
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Keywords
Capacity constraints, Mean reversion, Electricity indicated demand, Electricity indicated generation, Regime switching model