Abstract
Australian electricity spot prices differ considerably from equity spot prices in that they contain an extremely rapid mean-reversion process. The electricity spot price could increase to a market cap price of AU$12,500 per megawatt hour (MWh) and revert back to a mean level (AUD$30) within a half-hour interval. This has implications for derivative pricing and risk management. For example, while the Black and Scholes option pricing model works reasonably well for equity market-based securities, it performs poorly for commodities like electricity. Understanding the dynamics of electricity spot prices and demand is also important in order to correctly forecast electricity prices. We develop econometric models for seasonal patterns in both price returns and proportional changes in demand for electricity. We also model extreme spikes in the data. Our study identifies both seasonality effects and dramatic price reversals in the Australian electricity market. The pricing seasonality effects include time-of-day, day-of-week, monthly, and yearly effects. There is also evidence of seasonality in demand for electricity.
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Notes
- 1.
See Montero et al. (2011) for further evidence in the Spanish market.
- 2.
Additional statistics are provided for the demand series but not for the price series. This is because the original paper on the price series reports these values.
- 3.
Sample data for 2006 only includes the month of January and is unlikely to be representative of the full year.
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Acknowledgment
The authors wish to acknowledge the financial support of the Australian Centre for Financial Studies, via grant 18/2005. The research on the seasonality within the spot price has been published in 2011, “Seasonal factors and outlier effects in rate of return in Australia’s National Electricity Market,” Applied Economics, Vol. 43, Issue 3; pp. 355–369. Binesh Seetanah provided invaluable research assistance. Any remaining errors are the responsibility of the authors.
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Ramiah, V., Thomas, S., Heaney, R., Mitchell, H. (2015). Seasonal Aspects of Australian Electricity Market. In: Lee, CF., Lee, J. (eds) Handbook of Financial Econometrics and Statistics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7750-1_33
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DOI: https://doi.org/10.1007/978-1-4614-7750-1_33
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