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Literature Review: Electricity Pricing

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

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  1. Literature Review: Electricity Pricing ECON 539 3/11/2009 Presented by Paul Aljets

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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?????????

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