Prediction of extreme price occurrences in the German day-ahead electricity market

authored by: Lars Ivar Hagfors, Hilde Hørthe Kamperud, Florentina Paraschiv, Marcel Prokopczuk, Alma Sator, Sjur Westgaard
Abstract: Understanding the mechanisms that drive extreme negative and positive prices in day-ahead electricity prices is crucial for managing risk and market design. In this paper, we consider the problem of understanding how fundamental drivers impact the probability of extreme price occurrences in the German day-ahead electricity market. We develop models using fundamental variables to predict the probability of extreme prices. The dynamics of negative prices and positive price spikes differ greatly. Positive spikes are related to high demand, low supply and high prices the previous days, and mainly occur during the morning and afternoon peak hours. Negative prices occur mainly during the night and are closely related to low demand combined with high wind production levels. Furthermore, we do a closer analysis of how renewable energy sources, hereby photovoltaic and wind power, impact the probability of negative prices and positive spikes. The models confirm that extremely high and negative prices have different drivers, and that wind power is particularly important in relation to negative price occurrences. The models capture the main drivers of both positive and negative extreme price occurrences and perform well with respect to accurately forecasting the probability with high levels of confidence. Our results suggest that probability models are well suited to aid in risk management for market participants in day-ahead electricity markets.
Organisation(s): Institute of Finance and Commodity Markets
Faculty of Economics and Management
External Organisation(s): Norwegian University of Science and Technology (NTNU)
University of St. Gallen (HSG)
Type: Article
Journal: Quantitative Finance
Volume: 16
Pages: 1929-1948
No. of pages: 20
ISSN: 1469-7688
Publication date: 01.12.2016
Publication status: Published
Peer reviewed: Yes
ASJC Scopus subject areas: Finance, Economics, Econometrics and Finance(all)
Sustainable Development Goals: SDG 7 - Affordable and Clean Energy
Electronic version(s): https://doi.org/10.1080/14697688.2016.1211794 (Access: Unknown)