An Analysis of Price Volatility in Different Spot Markets for Electricity in the U.S.A.

Mount, Timothy | Oh, Hyungna | Spot Markets
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T. Mount, Y. Ning, H-N. Oh
Presented at 19th Annual Conference on the Competitive Challenge in Network Industries for the Advanced Workshop in Regulation and Competition, sponsored by the Center for Research in Regulated Industries, Rutgers University, Bolton Landing, NY, May.

Earlier research has shown that the behavior of spot prices in the new auction markets for electricity can be described by a stochastic regime-switching model. This model captures the observed price spikes that occur in these markets, particularly during the summer months when levels of load are high. The first part of the paper shows how the exploitation of market power can lead to offers to sell power that are consistent with price spikes. An important feature of the model is that some suppliers are indifferent to having marginal units dispatched when they have sufficient market power. Given this analytical framework, the second part of the paper extends the regime switching model of prices by making key parameters functions of forecasted load. The first application shows how the structure of the PJM market changed when market-based offers were allowed, resulting in higher price spikes. The second application compares price behavior in PJM, New England and California. The transition probabilities in the three markets have similar relationships to load. The main differences among markets are the levels of the means in the high-price regime, and in this respect, PJM is quite different from the other two markets. Efforts to associate price spikes with errors in the forecasts of load or changes of actual load were not successful. The conclusion is that more research is needed to understand the motivation of suppliers submitting offers into an auction market.