A Structural Model for Electricity Prices with Spikes - Measurement of Jump Risk and Optimal Policies for Hydropower Plant Operation
Hitotsunbashi University ICS Finance Working Paper No. FS-2004-E-02
36 Pages Posted: 2 Jul 2004
Date Written: June 20, 2004
This paper proposes a new, structural model for electricity prices. We show that unlike other electricity price models, such as the jump diffusion model and the Box-Cox transformation model, the structural model can directly and accurately incorporate the relationship between electricity demand and price spikes.
We also illustrate the usefulness of the structural model for optimal power generation and risk management using the example of a pump-storage hydropower plant.
The structural model can describe the probability of price spikes easily in terms of electricity demand, and provides more realistic optimal operation policies than the jump diffusion model.
Keywords: electricity, price spike, demand/supply, optimal power generation
JEL Classification: C61, D21, G13, L94, Q40
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