Hedging Strategy and Electricity Contract Engineering - IFOR

2.9 Price dynamic 39
simple sinus function, but a more complicated function, these variations are for
computational tractability usually modeled with a simple sinus function, which
is added to the function with a yearly periodicity
Q t Q Q
amp
y sinSXT yt U yV Q
amp
d
sinSXT dt U dV?G (2.4)
amp
Q where
d
denotes the amplitude of the daily variations. T The d is chosen
such that a daily frequency is achieved. If t is measured in T years
should consequently be given by 2W 365 . The U phase d is to be chosen such
that the maximum Q of t occurs when prices are peaking, typically around noon.
In addition to the yearly and daily periodicity also a weekly periodicity could
be built into the level of mean reversion to capture the fact that demand and
hence prices tend to be lower on weekends compared to weekdays.
2.9.4. Jumps
Electricity prices exhibit infrequent, but large jumps. The spot price can
increase with several hundred percent in one hour, which is illustrated in
the right part of Figure 2.14. This is an effect of the non-storable nature of
electricity, which cannot be substituted for electricity available shortly after
or before, since it has to be consumed at the same time as it is produced.
Therefore, electricity sold at different times of the day actually should be
viewed as different commodities. Jumps in the electricity price are an effect
of dramatic load fluctuations, caused by extreme weather conditions often in
combination with generation outages or transmission failures, possibly cutting
of some plants. These spikes are normally quite short-lived, and as soon as the
weather phenomena or outage is over, prices fall back to a normal level.
The spot price S, given as the intersection between demand D, and supply,
is not very sensitive to demand shifts when the demand is low, since the supply
stack typically is flat in the low-demand region. When demand is high
however only small increments in demand can have huge effects on the price,
since demand then intersects with the steep part of the supply stack. If demand
increases so much that the supply side simply is not there to meet this