Modeling the exact convergence of electricity prices in interconnected markets

Troels Sønderby Christensen, Fred Espen Benth

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Abstrakt

The liberalization of energy markets worldwide during recent decades has introduced severe implications on the price formation in these markets. Especially within the European day-ahead electricity markets, increased physical connections between different market areas and a joint effort on optimizing the aggregate social welfare have led to highly connected markets. Consequently, observing the exact same hourly day-ahead prices - exact price convergence - for two or more interconnected electricity markets in Europe happens frequently, which affects the modeling of such prices and in turn the valuation of derivatives written on prices from such interconnected market areas. In this paper, we propose a continuous-time model that takes this feature into account in a reduced-form manner. We discuss the properties of the model and propose an estimation procedure. Furthermore, the properties of the model reveals that analytical prices are attainable for e.g. forwards and spread options.
OriginalsprogEngelsk
TidsskriftEnergy Economics
Antal sider19
ISSN0140-9883
DOI
StatusAfsendt - 2019

Fingeraftryk Dyk ned i forskningsemnerne om 'Modeling the exact convergence of electricity prices in interconnected markets'. Sammen danner de et unikt fingeraftryk.

Citationsformater