Electricity markets around the world
Introduction
Over the last decades power markets around the world became deregulated and in many countries electricity is now traded under competitive rules. Often as part of the deregulation, power exchanges or power pools were established, where producers, traders, and large consumers can buy or sell power in organized markets (Pilipovic, 1997, Kaminski, 1999, Weron, 2006, Benth et al., 2008). After initial attempts in the 1980s in South America, the first power exchanges in developed countries appeared in the 1990s, starting with markets in the United Kingdom and Scandinavia. Since then, more and more competitive electricity markets have been established, and by the end of the 1990s various markets in Europe, North America, and Australia were operating. In North America the ambition to further raise power markets was hampered by the electricity crises in California, and the subsequent shut down of the Californian power exchange in 2001 (Wolak, 2003, Sweeney, 2008). Unimpressed by this development, additional markets came into existence in the early years of the 21st century in Europe and other parts of the world. Nowadays, there exist markets around the world, in developed as well as developing countries, and with coverage from regional to international areas. A good overview of the development in the United States is given by Joskow (2006), and information on the development in the European Union can be found in, e.g., Newbery (2002).
With the emergence of wholesale markets for power, a new type of commodity became tradeable. But due to some unique characteristics, the behavior of electricity spot prices differs significantly from other commodities, or financial assets. Most important to mention is the need for simultaneous production and consumption of power that, accompanied with the non-storability,1 leads to distinct price attributes. Knittel and Roberts (2005) list stationarity of prices, seasonal cycles, extreme price swings, and time-varying volatility as relevant characteristics of power prices. The most prominent feature of spot electricity prices are probably so-called price spikes, accounting for a large part of the high volatility in the markets. These characteristics make power prices an interesting field for research and various studies have been conducted on modeling and forecasting electricity prices, as well as on hedging and risk management in power markets, see, e.g. Bessembinder and Lemmon, 2002, Lucia and Schwartz, 2002, Knittel and Roberts, 2005, Geman and Roncoroni, 2006, Bierbrauer et al., 2007, Huisman et al., 2007, Kanamura and Ohashi, 2008, Coulon et al., 2013, Janczura et al., 2013, Weron, 2014, Birkelund et al., 2015, Füss et al., 2015, Ignatieva and Trück, 2016, Kiesel and Kusterman, 2016, Manner et al., 2016, Secomandi, 2016, just to mention a few.
Besides modeling the behavior of electricity spot prices, other studies have focused on understanding the underlying market structure and the determinants of observed electricity prices. Wolak (2000) analyzes the early markets in England and Wales, New Zealand, Victoria, and the Scandinavian Nordpool market, focusing on deregulation and price behavior. Broad studies on comparing international power markets from different perspectives were performed by Li and Flynn, 2004a, Li and Flynn, 2004b, Escribano et al., 2011, Erdogdu, 2014, Streimikiene and Siksnelyte, 2016. Li and Flynn, 2004a, Li and Flynn, 2004b analyse spot price behavior of 14 different power markets in North America, Europe, and Australasia.2 In Li and Flynn (2004a) the seasonal intraday patterns of the markets are described and compared, whereas Li and Flynn (2004b) focus on examining volatility in the considered markets. Escribano et al. (2011) examine the evolution of electricity prices in deregulated markets, considering markets in Argentina, Australia, Canada, New Zealand, the Netherlands, Scandinavia, Spain, and the US. They find strong evidence that electricity prices are seasonal and mean-reverting, and exhibit volatility clustering and jumps with time-dependent intensity. Using panel data from 55 developed and developing countries, Erdogdu (2014) examines the impact of political and economic variables on the liberalization process in electricity markets. Streimikiene and Siksnelyte (2016) provide a sustainability assessment of electricity market models for 12 developed countries, including economic, social and environmental criteria. Pirrong (2017) provides a review on manipulation in commodity markets and suggests that power market manipulations are typically action-based, for example, electricity generators could declare a plant outage in order to drive up the price of electricity and increase the payout on electricity derivatives contracts.
To the best of our knowledge, the studies by Ly and Flynn so far provide the broadest overview of the price behavior in various deregulated power markets around the world. Typically studies on the volatility or behavior of spot electricity prices are focused on a single power exchange or only a few markets. For example, Zareipour et al. (2007) analyze the volatility and market design in Ontario, Bask and Widerberg (2009) the impact of market expansion in the Scandinavian market, or Kalantzis and Milonas (2013) the impact of the introduction of a futures market on the volatility in Germany and France. Bessembinder and Lemmon (2002) analyze the effect of hedging decisions for power producers and consumers on power prices, their season, as well as volatility. A study on the effect of data frequency on the volatility of power prices is performed by Ullrich (2012), considering markets in the United States and Australia. Janczura et al. (2013) examine the impact of identifying spikes on the estimation of seasonal components in electricity spot markets in Germany and Australia. Nowotarski et al. (2014) provide an empirical comparison of alternative schemes for combining electricity spot price forecasts in three major European and US markets.
In this study, we contribute to the literature by examining a unique data set of intraday prices of 28 different power markets across the world, focusing on key features of spot electricity prices such as seasonal behavior, price levels and variation, as well as higher moments of the observed price series. Using data on spot electricity prices from the initiation of each market until the end of 2012, we also relate the price behavior to the structure and characteristics of the individual markets. We use a very comprehensive data set, comprising hourly spot electricity prices from exchanges of 19 different countries in Europe, the US, Asia and Australia. To the best of our knowledge this is the most extensive database that has been considered in the literature so far to examine the behavior of spot electricity prices in various markets around the world.
We find significant differences between the considered markets with respect to price levels, the frequency and magnitude of price jumps and spikes as well as the volatility, skewness and kurtosis of spot electricity prices. While, for our sample period until 2012, the Australian markets were typically characterized by low prices and relatively low levels of annual, weekly and intra-daily seasonality, they were also by far the most volatile markets in this study. On the other hand, European markets in Belgium, Switzerland and Italy as well as the Asian markets in Singapore, India and South Korea had the highest average price levels among all 28 markets considered.
We also conduct a principal component analysis (PCA) and illustrate that a high fraction of the variation (over 80%) between the markets can be explained by three principal components, that can be interpreted as a dispersion factor, a weekly and intra-daily seasonality factor and a price level and annual seasonality factor. The results of the conducted PCA also illustrate that the markets can typically be classified into different groups according to the three identified factors.
We further find that electricity markets organized as day-ahead markets exhibit a significantly lower overall price variation compared to markets with real-time trading. These differences exist in a cross-market observation, as well as for markets that feature both trading schemes. Overall, our findings suggest that in real-time electricity markets, retailers and large customers with direct access to power exchanges will be required to more thoroughly hedge their risks from extreme price variation and price jumps in the spot market.
Our results provide important information for market participants by classifying the considered markets with respect to associated price and volatility risks. They also illustrate how observed characteristics of spot electricity prices are related to market features such as the organization of the power exchange, electricity generation and fuel sources.
The remainder of this article is organized as follows. Section 2 describes the development of power markets and illustrates differences in the market structure. Section 3 presents the data and methodologies we use. Empirical results are provided in Section 4, while Section 5 concludes.
Section snippets
Deregulation and development of power markets
Before deregulation, in most of the countries considered in this study, large, often state owned, monopolies were responsible for production, transmission, and distribution of electric power. Starting from this background, deregulation took place in various forms, but the common aim was to stimulate competition in the electricity sector. Usually the way to achieve this was to split up vertically integrated power producers and privatize state owned utilities. As the power grid is a perfect
Data
For this study we collected power price data of 28 different markets: five markets in Australia, 12 in Europe, seven in North America, and four in Asia. Table 1 lists the markets and their system area. Markets in Australia, Canada, and the United States are covering one or more states, whereas the markets in Europe are usually national or even international markets. Further the table shows information on the time of deregulation, the market organization, as well as some basic information on the
Empirical results
In the following section we describe empirical results for the considered electricity markets around the world. In particular we will focus on a comparison of the markets with regards to price levels, seasonality in prices at the annual, weekly and intra-daily level, price volatility as well as the occurrence and magnitude of price jumps or spikes. We also conduct a principal component analysis and illustrate that the key features of spot price behavior in the markets can be classified based on
Conclusion
In this paper, we have examined hourly spot electricity prices of 28 different power markets across Asia, Australia, Europe and North America. In our analysis we considered the most extensive database in the literature so far, comprising electricity exchanges from 19 different countries around the world for a sample period ranging from 1999 to 2012. We focus on market characteristics such as price levels, volatility, skewness, seasonal behavior and price jumps, and relate these characteristics
Acknowledgements
This work was supported by funds from the Australian Research Council through grant no. DP1096326.
References (49)
- et al.
Market structure and the stability and volatility of electricity prices
Energy Econ.
(2009) - et al.
Spot and derivative pricing in the EEX power market
J. Bank. Financ.
(2007) - et al.
A comparison of implied and realized volatility in the nordic power forward market
Energy Econ.
(2015) - et al.
Strategic bidding and rebidding in electricity markets
Energy Econ.
(2016) - et al.
A model for hedging load and price risk in the Texas electricity market
Energy Econ.
(2013) - et al.
The case of negative day-ahead electricity prices
Energy Econ.
(2013) - et al.
Electricity derivatives pricing with forward-looking information
J. Econ. Dynam. Contr.
(2015) - et al.
Hourly electricity prices in day-ahead markets
Energy Econ.
(2007) - et al.
Regime jumps in electricity prices
Energy Econ.
(2003) - et al.
Modeling spot price dependence in Australian electricity markets with applications to risk management
Comput. Oper. Res.
(2016)
Identifying spikes and seasonal components in electricity spot price data: a guide to robust modeling
Energy Econ.
An empirical comparison of alternate regime-switching models for electricity spot prices
Energy Econ.
Analyzing the impact of futures trading on spot price volatility: evidence from the spot electricity market in France and Germany
Energy Econ.
On transition probabilities of regime switching in electricity prices
Energy Econ.
Structural models for coupled electricity markets
Journal of Commod. Markets
An empirical examination of restructured electricity prices
Energy Econ.
Deregulated power prices: comparison of diurnal patterns
Energy Pol.
Deregulated power prices: comparison of volatility
Energy Pol.
Modeling and forecasting multivariate electricity price spikes
Energy Econ.
Predicting price spikes in electricity markets using a regime-switching model with time-varying parameters
Energy Econ.
Problems of liberalising the electricity industry
Eur. Econ. Rev.
An empirical comparison of alternative schemes for combining electricity spot price forecasts
Energy Econ.
The economics of commodity market manipulation: a survey
J. Commod. Markets
A tutorial on portfolio-based control algorithms for merchant energy trading operations
J. Commod. Markets
Cited by (91)
Performance analysis of integrated Nuclear-Solar Energy system sharing same molten salt thermal energy storage
2024, Progress in Nuclear EnergyAustralian energy policy decisions in the wake of the 2022 energy crisis
2024, Economic Analysis and PolicyData-driven distributionally robust optimization for long-term contract vs. spot allocation decisions: Application to electricity markets
2023, Computers and Chemical Engineering