Directional Congestion and Regime Switching in a Long Memory Model for Electricity Prices

Aarhus University Economics Paper No. 2005-18

26 Pages Posted: 18 Jun 2008

See all articles by Niels Haldrup

Niels Haldrup

Aarhus University, School of Economics and Management; CREATES

Morten Ørregaard Nielsen

Aarhus University - Department of Economics and Business Economics

Date Written: October 16, 2005

Abstract

The functioning of electricity markets has experienced increasing complexity as a result of deregulation in recent years. Consequently this affects the multilateral price behaviour across regions with physical exchange of power. It has been documented elsewhere that features such as long memory and regime switching reflecting congestion and non-congestion periods are empirically relevant and hence are features that need to be taken into account when modeling price behavior. In the present paper we further elaborate on the co-existence of long memory and regime switches by focusing on the effect that the direction of possible congestion episodes has on the price dynamics. Under non-congestion prices are identical. The direction of possible congestion is identified by the region with excess demand of power through the sign of price differences and hence three different states can be considered: Non-congestion and congestion periods with excess demand in the one or the other region. Using data from the Nordic power exchange, Nord Pool, we find that the price dynamics and long memory features of the price series generally are rather different across the different states. Also, there is evidence of fractional cointegration at some grid points when conditioning on the states.

Keywords: Cointegration, electricity prices, forecasting, fractional integration and cointegration, long memory, Markov switching

JEL Classification: C2, C22, C32

Suggested Citation

Haldrup, Niels and Haldrup, Niels and Nielsen, Morten Orregaard, Directional Congestion and Regime Switching in a Long Memory Model for Electricity Prices (October 16, 2005). Aarhus University Economics Paper No. 2005-18, Available at SSRN: https://ssrn.com/abstract=1147614 or http://dx.doi.org/10.2139/ssrn.1147614

Niels Haldrup (Contact Author)

Aarhus University, School of Economics and Management ( email )

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CREATES ( email )

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Morten Orregaard Nielsen

Aarhus University - Department of Economics and Business Economics ( email )

Denmark