A Family of Reduced-Form Models for Electricity Prices
Posted: 14 Jun 2003
This paper presents a family of processes to model electricity spot prices in deregulated markets. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a "jump-reversion" component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our appoach allows to capture - for the first time to our knowledge - both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.
JEL Classification: C51, C52
Suggested Citation: Suggested Citation