Stochastic factor model for electricity spot price: the case of the Nordic market

Iivo Vehviläinen; Tuomas Pyykkönen

doi:10.1016/j.eneco.2005.01.002

Stochastic factor model for electricity spot price: the case of the Nordic market

Iivo Vehviläinen, Tuomas Pyykkönen

Not published at Aalto University

Research output: Contribution to journal › Article › Scientific › peer-review

Abstract

This paper presents a stochastic factor based approach to mid-term modeling of spot prices in deregulated electricity markets. The fundamentals affecting the spot price are modeled independently and a market equilibrium model combines them to form spot price. Main advantage of the model is the transparency of the generated prices because each underlying factor and the dynamics between factors can be modeled and studied in detail. Paper shows realistic numerical examples on the forerunner Scandinavian electricity market. The model is used to price an exotic electricity derivative.

Original language	English
Pages (from-to)	351–367
Journal	Energy Economics
Volume	27
Issue number	2
DOIs	https://doi.org/10.1016/j.eneco.2005.01.002
Publication status	Published - 2005
MoE publication type	A1 Journal article-refereed

Keywords

Electricity prices
Stochastic factor models
Deregulated markets

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10.1016/j.eneco.2005.01.002

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title = "Stochastic factor model for electricity spot price: the case of the Nordic market",

abstract = "This paper presents a stochastic factor based approach to mid-term modeling of spot prices in deregulated electricity markets. The fundamentals affecting the spot price are modeled independently and a market equilibrium model combines them to form spot price. Main advantage of the model is the transparency of the generated prices because each underlying factor and the dynamics between factors can be modeled and studied in detail. Paper shows realistic numerical examples on the forerunner Scandinavian electricity market. The model is used to price an exotic electricity derivative.",

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AB - This paper presents a stochastic factor based approach to mid-term modeling of spot prices in deregulated electricity markets. The fundamentals affecting the spot price are modeled independently and a market equilibrium model combines them to form spot price. Main advantage of the model is the transparency of the generated prices because each underlying factor and the dynamics between factors can be modeled and studied in detail. Paper shows realistic numerical examples on the forerunner Scandinavian electricity market. The model is used to price an exotic electricity derivative.

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KW - Deregulated markets

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