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Common Unobserved Determinants of Intraday Electricity Prices

Nikolaos S. Thomaidis, Gordon H. Dash, and Nina Kajiji

Year: 2019
Volume: Volume 40
Number: The New Era of Energy Transition
DOI: 10.5547/01956574.40.SI1.ntho
View Abstract

This paper employs multilevel factor modelling techniques to unravel systematicunobserved determinants of the intraday and interzonal price curve dynamics forthe Pennsylvania-New Jersey-Maryland (PJM) interconnection. These techniquesmake an explicit separation of global drivers from region-specific common factors, thereby facilitating the identification of the actual sources of co-variability.Our empirical findings confirm the hypothesis that the common unobserved determinants of power prices in the PJM interconnection obey a block structure, someof which affect different segments of our panel. We argue that a multilevel factorapproach offers a more systematic and transparent representation of intertemporal and cross-sectional patterns in PJM electricity prices compared to alternativebrute-force VARMAX parametrizations and the single-level factor models, whichare often put forward in the literature as viable modelling alternatives.

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