The European power industry : asymmetries and price volatility

A time series model was used to obtain empirical evidence on the spot price volatility of the Spanish electricity market. The model was based on a single market operator and 2 system operators. A generalized autoregressive conditional heteroskedasticity (GARCH) model was used to model and forecast conditional variances related to the spot price volatility of the Spanish electricity market. A correlogram analysis was used to model the processes behind the time series. Autocorrelation and partial autocorrelation functions were used to demonstrate that the the derived electricity spot price series was not a random walk. Lags in various areas were attributed to the fact that a large proportion of electricity is consumed by industry. Weekly cycles justified values presented by a lags multiple of 7. Results of the modelling study showed that the method can be used in the risk management of electricity portfolios as well as in the pricing and hedging of different types of derivatives in electricity markets. It was concluded that further work is needed to reduce instability and asymmetries between generators, consumers and regulators. 16 refs., 5 tabs., 5 figs