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Electricity Price Volatility and the Marginal Cost of Congestion: An Empirical Study of Peak Hours on the NYISO Market, 2001-2004

We examine the volatility characteristics of the NYISO Day Ahead and Real Time electricity markets for peak hours from January 2001 to June 2004. GARCH models are used to study the differences in volatility across zones. We find that price volatility is higher but less persistent in the Real Time market than in the Day Ahead market. Furthermore, we document the importance of transmission congestion and empirically estimate its impact on volatility in electricity prices. We also examine the Day Ahead premium and show how it is related to volatility in Real Time prices. The implications for participants in these markets are discussed.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Transmission and Network Management; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electricity prices, volatility, GARCH, electricity markets, NYISO, congestion

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No2-9

Published in Volume 27, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.