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Short Term Spot Electricity Price Modeling In Competitive Electricity Markets

1650 words - 7 pages

1 Introduction
Electricity when viewed from an economic perspective is probably the most important man-made commodity of human race. Ever since its invention and commercial use in 18th century to this day, its contribution to progress, growth, innovation and development to mankind has been unequivocal. Electricity markets over the decades have always been regional, oligopolistic and vertically integrated. However, in the last few decades, power markets world-wide are being transformed from highly regulated Government controlled power markets into deregulated and competitive power markets. The traditional vertically integrated electric utility structures of yester-years have been replaced by a deregulated and competitive market scheme in many countries worldwide (Li et al., 2007; Weron, 2006, Girish et al., 2014).
The main objective of power market restructuring and deregulation has been to introduce competition in the power industry especially in the way electricity and ancillary services are traded thereby providing more options for power market participants to choose from (Amjady and Daraeepour, 2009). With the deregulation and increased competition, today, participants of power markets are facing new challenges. Electricity trading is no more a technical business and it has transformed in to one in which, the product is treated similar to any other commodity (Pilipovic, 1997). For example in India, short-term power market transactions (i.e. contracts of less than a year) accounted for approximately 11% (i.e. nearly 100 billion units) of the total electricity generated in India for the year 2012-13. Electricity trading is no more a nascent phenomena which can be neglected or ignored.
Electricity is a very unique commodity which is difficult to be economically stored and the end-user demand exhibits very strong seasonality. Events such as non-availability of resources (e.g., non-availability of coal for thermal power stations), power plant outages, imperfect transmission grid reliability or breakdown of electrical transformers may have extreme effects on electricity spot prices (Aggarwal et al., 2009; Weron, 2006; Girish et al., 2013). Price curve of electricity market exhibits richer structure having multiple seasonality (i.e., daily, weekly, monthly, hourly), non-constant mean and variance, high frequency, Calendar effects, high levels of volatility and unusual price movements (Karakatsani and Bunn, 2004). These characteristics could be attributed to the reasons which make electricity different from other commodities such as non-storable nature of electrical energy, requirement to maintain a constant balance between demand and supply, possible inelastic nature of demand over short time periods, oligopolistic generation sector in certain electricity markets and the load and generation side uncertainties (Bunn, 2000; Aggarwal et al., 2009; Weron, 2006; Girish et al., 2014).
According to Weron (2006), if classical notion of volatility (i.e.,...

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