Hedging Strategy and Electricity Contract Engineering - IFOR

2.9 Price dynamic 37
400
2000
350
1800
300
1600
1400
NOK/MWh
250
200
150
NOK/MWh
1200
1000
800
100
600
400
50
200
0
1998 1999 2000
0
1998 1999 2000
(a) Daily average
(b) Hourly
Fig. 2.14: Spot prices at Nord Pool from 1997-12-30 to 2000-05-06.
can be extended as
dS t R Q t S t dt F S t dW t
P (2.3)
The speed of mean R reversion determines how fast the price will revert to
its mean level. In the SDE (2.3) the level of mean reversion is made time
dependent to reflect the fact that electricity prices tend to revert to different
levels over the year.
2.9.2. Seasonal fluctuations
As already mentioned, demand follows seasonal fluctuations, mainly influenced
by climate and in Europe the demand peaks in the winter. Also the
supply side shows seasonal variations in output. Hydro units, for example, are
heavily dependent on precipitation and snow melting, which vary with seasons.
These seasonal fluctuations in demand and supply are directly translated into
seasonal fluctuating electricity prices. The left part of Figure 2.14, showing the
daily average spot prices at Nord Pool, clearly shows this seasonal component,
with high prices in the winter and low prices in the summer.
These seasonal fluctuations is typically modeled by letting the level of mean
reversion follow a deterministic sinus function