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Literature Review: Electricity Pricing . ECON 539 3/11/2009 Presented by Paul Aljets. Background. Electricity markets are Different Must have a steady flow. Electricity cannot be easily stored. Prices are extremely volatile. Power grid must be constantly watched.

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literature review electricity pricing

Literature Review: Electricity Pricing

ECON 539

3/11/2009

Presented by Paul Aljets

background
Background
  • Electricity markets are Different
    • Must have a steady flow.
    • Electricity cannot be easily stored.
    • Prices are extremely volatile.
  • Power grid must be constantly watched.
    • Overloads (Blackouts) = Too much power in the grid.
    • Brown-outs = Too little power to meet demand.
slide3

First Theory: Forward PricingVehvilainen, Ilvo (2001).Basics of Electricity Derivative pricing in Competitive Markets. Applied Mathematical Finance. 9, 45-60.

  • Dr. Ilvo Velvehilainen
    • Professor in Fortum, Finland.
  • Forward Pricing
    • Observing the changes in a country and regressing predicted future prices for the next time period.
    • Dr. V. says the model needs more variables.
      • Adds variables for seasonal demand and for wholesale contracts.
first paper analysis
First Paper: Analysis
  • No data presented.
    • So, can’t replicate or test robustness.
    • Written for people already knowledgeable in the topic.
  • No consideration for regional price differences.
  • No obvious agenda.
  • Widely accepted model theory in Europe.
slide5

Second Paper: Mean reverting Jump DiffusionCartea, Alvaro, & Figueroa, Marcelo G. (2005). Pricing in Electricity Markets: a Mean Reverting Jump Diffusion Model with Seasonality. Applied Mathmatical Finance. 12-4, 313-335.

  • By Alvaro Cartea and Marcelo Figueroa.
    • Professors at Birkbeck College, London.
    • Originally from Chile.
      • One of the first countries to privatize electrcity.
  • Model accounts from time on a business cycle, month and weekly basis.
  • Model accounts for Regional Differences.
    • Demand in London is different than demand in Wales.
  • MOST IMPORTANT: Control for freak jumps in demand.
second paper analysis
Second Paper: Analysis
  • Lots of Data!
    • If I cared, I could replicate the data.
  • More accurate than forward pricing.
  • Total lack of self-evaluation and consideration for further research.
slide7

Third Theory: Nodal Bid-based PricingHogan, William W. (2008). Electricity Market Structure and Infrastructure. Conference on Acting in Time on Energy Policy.

  • Nodal Pricing
    • Different prices at every power node.
    • Based on contract bidding.
    • “Spinning Reserves.”
      • Back-up energy to avoid brown-outs.
  • Leading American Expert: Dr. William Hogan
    • Professor at Harvard.
    • Free-market advocate.
  • His paper make recommendations for Federal Energy regulatory Commission.
    • More regional regulation.
    • Increase information transparency.
third paper analysis
Third Paper: Analysis
  • Completely Qualitative.
    • No data.
    • FERC was his audience.
    • Very accessible.
  • All American papers seem to have less data emphasis.
  • Takes most of the credit.
    • The coauthors are placed in a footnote.
conclusions on the literature
Conclusions on the Literature
  • Forward Pricing/ Mean reverting Jump Diffusion.
    • Requires lots of data to calculate price.
    • More prone to brown-outs.
      • Tend to underestimate.
  • Nodal Pricing
    • Bid based, making it easy to price.
    • Chaotic, Confusing
    • Prone to black-outs.
  • Questions?????????