Modelling Electricity Prices with Forward Looking Capacity Constraints

Applied Mathematical Finance, Volume 16, Issue 2, 2009, p 103-122

36 Pages Posted: 26 Jan 2008 Last revised: 11 Mar 2013

See all articles by Álvaro Cartea

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Marcelo G. Figueroa

University of London - Birkbeck College

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Date Written: January 16, 2008

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.

Keywords: capacity constraints, mean reversion, electricity, indicated demand, electricity indicated generation, regime switching model

JEL Classification: G12, G13

Suggested Citation

Cartea, Álvaro and Figueroa, Marcelo G. and Geman, Helyette, Modelling Electricity Prices with Forward Looking Capacity Constraints (January 16, 2008). Applied Mathematical Finance, Volume 16, Issue 2, 2009, p 103-122, Available at SSRN: https://ssrn.com/abstract=1087389 or http://dx.doi.org/10.2139/ssrn.1087389

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Marcelo G. Figueroa

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Helyette Geman

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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