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

Iivo Vehviläinen, Tuomas Pyykkönen

Research output: Contribution to journalArticleScientificpeer-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 languageEnglish
Pages (from-to)351–367
JournalEnergy Economics
Volume27
Issue number2
DOIs
Publication statusPublished - 2005
MoE publication typeA1 Journal article-refereed

Keywords

  • Electricity prices
  • Stochastic factor models
  • Deregulated markets

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