Abstract
The U.S. electricity market is organized in several deregulated regional markets. In this paper we specify a multi-regime switching model to study price dynamics of electricity in the U.S. markets. Our results show that electricity prices from the West and East coasts have different regime dynamics with the latter prices switching more frequently between regimes. Additionally, our methodology suggests that electricity prices are better parameterized by four regimes: the base regime with low volatility; a spike up and a reverse regime both with high volatility and short duration; finally, a fourth one has extremely high volatility. This latter regime describes West coast prices during the California electricity crisis, but East coast prices are also frequently in that regime. We find evidence of price synchronization in the lowest and highest volatility regimes, i.e., prices from the East and West coasts tend to be in the same regimes at the same time.
Financial support from Fundação para a Ciência e Tecnologia is greatly acknowledged (PTDC/EGE-GES/103223/2008).
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The grid needs to be constantly surveyed and cannot be under or overloaded. This implies that if wires owned by different companies were allowed to interconnect to form a single network, then the flow on one line could affect the capacity of other lines in the system to carry power creating risky unbalances.
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A recent case of grid collapse happened in India. India has increased the number interconnections between regional grids, approaching a single national grid. A breakdown in one part of the grid loaded other parts of the grid massively making the system collapse.
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Energy traders took power plants offline for maintenance in days of peak demand. This increased power prices sometimes by 20 times its normal price.
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Other econometric approaches such as stochastic jump models have been applied in energy price modeling. Comparisons show that regime-switching models present many advantages in modeling the spiky and nonlinear behavior of electricity prices over competing techniques (Bierbrauer et al. 2007; Janczura and Weron, 2010; Mari 2006; Weron et al. 2004).
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We will apply terminology common to previous papers to characterize regimes: base, reverse, and spike regimes.
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The case of California led to specific measures in order to prevent similar cases. For instance, Moulton (2005) mentions the introduction of mitigation procedures after the energy crisis in California (2000–2001).
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Dias, J.G., Ramos, S.B. (2014). An Overview of Electricity Price Regimes in the U.S. Wholesale Markets. In: Ramos, S., Veiga, H. (eds) The Interrelationship Between Financial and Energy Markets. Lecture Notes in Energy, vol 54. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-55382-0_9
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