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Econometric Estimation of Spatial Patterns in Electricity Prices

Information about the spatial structure of the transmission grid is relevant to understanding and predicting electricity prices, but this information has not been incorporated into empirical models of electricity prices in the literature. We propose the use of spatial econometric panel methods, discuss their formal characteristics in the context of electricity price data, and provide an application to a panel of PJM price data. Our econometric model includes a simple representation of the transmission system, and provides information about the effect of system constraints on the extent of electricity market integration. Empirical results confirm the existence of spatial patterns in electricity prices and illustrate their impact on estimation, forecasting, and interpolation.

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Energy Specializations: Electricity – Transmission and Network Management; Electricity – Markets and Prices

JEL Codes:
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly

Keywords: Electricity prices, Spatial patterns, Electricity transmission, panel data, PJM

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No2-4

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Published in Volume 32, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.