On modelling electricity spot prices: A case study for the Turkish market

Yıl 2022, Cilt: 22 Sayı: 1, 33 - 48, 30.01.2022

Ali Ulvi Özgül Dündar Kök

https://doi.org/10.21121/eab.1060605

Öz

This paper demonstrates the significance of jump threshold in terms of modeling and generating realistic trajectories for an electricity spot price process. Determining the suitable threshold and choosing among distributions proposed in literature are key to the followed moment-matching strategy. This is implemented in a two-factor model framework with the Turkish spot electricity price data. The market studied is a developing one which has taken huge steps in liberalization by learning from more advanced markets, yet with limited research on her spot price dynamics. The selected two-factor model entails downward jumps, which are increasingly getting essential components of the process with the progressing integration of renewable sources. Such components are notably observed since 2015 in the spot market. Moreover, considering structural changes in seasonality both improves the model fit and reveals the same year as the break year for Turkish market. Finally, underlying economic interactions and policy implications for the market are discussed.

Anahtar Kelimeler

Turkish electricity market, Spot price models, Seasonality modelling, Jump modelling, Seasonality breaks, Jump threshold, Risk management

Kaynakça

• Aid, R. (2015). Electricity Derivatives. Springer International Publishing AG.
• Barndorff-Nielsen, O. E., & Shephard, N. (2001). Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics. Journal of the Royal Statistical Society: Series B (Statistical Methodology), 63(2), 167–241. https:// doi.org/10.1111/1467-9868.00282
• Benth, F. E., Kallsen, J., & Meyer-Brandis, T. (2007). A non-Gaussian Ornstein-Uhlenbeck process for electricity spot price modeling and derivatives pricing. Applied Mathematical Finance, 14(2), 153–169. https://doi. org/10.1080/13504860600725031
• Benth, F. E., Šaltyte-Benth, J., & Koekebakker, S. (2008). Stochastic Modelling of Electricity and Related Markets. Singapore: World Scientific Publishing Co. Pte. Ltd.
• Cartea, Á., & Figueroa, M. G. (2005). Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality. Applied Mathematical Finance, 12(4), 313–335.
• Clewlow, L., & Strickland, C. (2000). Energy Derivatives: Pricing and Risk Management. London: Lacima Publications.
• Davis, G. F., & Kim, S. (2015). Financialization of the Economy. Annual Review of Sociology, 41(1), 203–221. https://doi. org/10.1146/annurev-soc-073014-112402
• De Jong, C. (2006). The Nature of Power Spikes: A Regime-Switch Approach. Studies in Nonlinear Dynamics & Econometrics, 10(3). https://doi.org/10.2202/1558-3708.1361
• Edwards, D. W. (2010). Energy Trading and Investing: Trading, Risk Management, and Structruring Deals in the Energy Markets. McGraw-Hill.
• Enerji Piyasalari Isletme A.S. (2016). Gun Oncesi Elektrik Piyasasi Piyasa Takas Fiyati Belirleme Yontemi. Retrieved from https://www.epias.com.tr/wp-content/uploads/2016/03/ public_document_v4_released.pdf
• European Energy Exchange AG. (2014). EEX Annual Report 2013. Retrieved from https://www.eex.com/ blob/30630/06c68199951eaea397b978d1435f006e/eexgb- 2013-en-pdf-data.pdf
• European Energy Exchange AG. (2017). EEX Annual Report 2016. Retrieved from https://www.eex.com/blob/66620/17cc36f9c69c14467c7827576dd68db7/ eexgb-%0A2016-enviewer- data.pdf
• Geman, H., & Roncoroni, A. (2006). Understanding the Fine Structure of Electricity Prices. The Journal of Business, 79(3), 1225–1261. https://doi.org/10.1086/500675
• Gonzalez, J., Moriarty, J., & Palczewski, J. (2017). Bayesian calibration and number of jump components in electricity spot price models. Energy Economics, 65, 375–388. https:// doi.org/10.1016/j.eneco.2017.04.022
• Grossi, L., Heim, S., Hüschelrath, K., & Waterson, M. (2018). Electricity market integration and the impact of unilateral policy reforms. Oxford Economic Papers, 70(3), 799–820. https://doi.org/10.1093/oep/gpy005
• Harris, C. (2006). Electricity Markets: Pricing, Structures and Economics. West Sussex: John Wiley & Sons Ltd.
• Hayfavi, A., & Talasli, I. (2014). Stochastic multifactor modeling of spot electricity prices. Journal of Computational and Applied Mathematics, 259, 434–442. https://doi.org/10.1016/j. cam.2013.10.008
• Janczura, J., & Weron, R. (2010). An empirical comparison of alternate regime-switching models for electricity spot prices. Energy Economics, 32(5), 1059–1073. https://doi. org/10.1016/j.eneco.2010.05.008
• Klüppelberg, C., Meyer-Brandis, T., & Schmidt, A. (2010). Electricity spot price modelling with a view towards extreme spike risk. Quantitative Finance, 10(9), 963–974.
• Lee, S. S., & Mykland, P. A. (2008). Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics. The Review of Financial Studies, 21(6), 2535–2563. https://doi. org/10.1093/rfs/hhm056
• Lucia, J. J., & Schwartz, E. S. (2002). Electricity prices and power derivatives: Evidence from the Nordic Power Exchange. Review of Derivatives Research, 5(1), 5–50. https://doi. org/10.1023/A:1013846631785
• Mayer, K., Schmid, T., & Weber, F. (2015). Modeling electricity spot prices: combining mean reversion, spikes, and stochastic volatility. European Journal of Finance, 21(4), 292–315. https://doi.org/10.1080/1351847X.2012.716775
• Meyer-Brandis, T., & Tankov, P. (2008). Multi-factor jump-diffusion models of electricity prices. International Journal of Theoretical and Applied Finance, 11(5), 503–528. https://doi. org/10.1142/S0219024908004907
• Nazarova, A. (2014). Stochastic Models for Energy Markets. Universitat Duisburg-Essen, Essen.
• Pirino, D., & Renò, R. (2010). Electricity Prices: A Nonparametric Approach. International Journal of Theoretical and Applied Finance, 13(2), 285–299.
• Popova, J. (2008). Essays on Pricing Electricity and Electricity Derivatives in Deregulated Markets. College of Business and Economics at West Virginia University, Morgantown, West Virginia.
• Schwartz, E. S. (1997). The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging. The Journal of Finance, 52(3), 923–973.
• Seifert, J., & Uhrig-Homburg, M. (2007). Modelling jumps in electricity prices: theory and empirical evidence. Review of Derivatives Research, 10(1), 59–85.
• Shahidehpour, M., Yamin, H., & Li, Z. (2002). Market Operations in Electric Power Systems: Forecasting, Scheduling, and Risk Management. New York: John Wiley & Sons, Inc.
• Talasli, I. (2012). Stochastic Modeling of Electricity Markets. Middle East Technical University, Ankara, Turkey.
• Tokyay, M. B., & Ozdemir, I. S. (2013). Turkiye Elektrik Piyasasi’nda Elektrik Ticareti.