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It Never Rains but it Pours: Modeling the Persistence of Spikes in Electricity Prices

Abstract:
During periods of market stress, electricity prices can rise dramatically. This paper treats these abnormal episodes or price spikes as count events and attempts to build a model of the spiking process. By contrast to the existing literature, which either ignores temporal dependence in the spiking process or attempts to model the dependence solely in terms of deterministic variables (like seasonal and day of the week effects), this paper argues that persistence in the spiking process is an important factor in building an effective model. A Poisson autoregressive framework is proposed in which price spikes occur as a result of the latent arrival and survival of system stresses. This formulation captures the salient features of the process adequately, and yields forecasts of price spikes that are superior to those obtained from na�ve models that do not account for persistence in the spiking process.

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

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

Keywords: Electricity prices, extreme events, Poisson regression, price spikes, Poisson Autoregressive Model

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No1-2


Published in Volume 30, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.