Prediction of extreme price occurrences in the German day-ahead electricity market

Abstract

Understanding the mechanisms that drive extreme negative and positive prices in day-ahead electricity prices is crucial for managing risk and market design. In this paper, we consider the problem of understanding how fundamental drivers impact the probability of extreme price occurrences in the German day-ahead electricity market. We develop models using fundamental variables to predict the probability of extreme prices. The dynamics of negative prices and positive price spikes differ greatly. Positive spikes are related to high demand, low supply and high prices the previous days, and mainly occur during the morning and afternoon peak hours. Negative prices occur mainly during the night and are closely related to low demand combined with high wind production levels. Furthermore, we do a closer analysis of how renewable energy sources, hereby photovoltaic and wind power, impact the probability of negative prices and positive spikes. The models confirm that extremely high and negative prices have different drivers, and that wind power is particularly important in relation to negative price occurrences. The models capture the main drivers of both positive and negative extreme price occurrences and perform well with respect to accurately forecasting the probability with high levels of confidence. Our results suggest that probability models are well suited to aid in risk management for market participants in day-ahead electricity markets.

Keywords:

• Energy markets
• Fundamental analysis
• Spikes
• EPEX

Acknowledgements

Marcel Prokopczuk and Sjur Westgaard gratefully acknowledge financial support from E.ON Stipendienfonds.

Notes

No potential conflict of interest was reported by the authors.

1 All variables have been tested and found to be stationary with an ADF test, except for price and coal price. Intuitively, they both have an upper and lower bound, and there is reason to expect that a longer time series of these prices would be found to be stationary.