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MARKET DESIGN AND ELECTRICITY PRICES: EVIDENCE FROM NORDPOOL AND CALIFORNIA
PRICE CRISES.
Laura Cavallo,
Department of Economic Affairs, Prime Minister's Office
E-mail: [email protected]
Sandro Sapio,
Sant’Anna School, Pisa
E-mail: [email protected]
Valeria Termini,
University of Cassino
E-mail: [email protected]
Preliminary version, December 2003.
Abstract
One of the steps of the electricity sector liberalization process that has characterized the last decade
has been the introduction of a wholesale electricity market. A number of studies argue that market
design can have a substantial impact on the behaviour of market prices. This paper compares the
behaviour of prices of two electricity markets, California and NordPool, in a period of crisis. Using
a comparative analysis, this work considers the impact of different institutional frameworks and
market rules on the performance of the wholesale electricity market with the aim of getting some
insight on the characteristics of the “best-practice” electricity market. The empirical results also
provide some insights on the relationship between market design and market power. The paper
concludes with some discussion about the lessons learned on market design that can be useful for
the design of competitive electricity spot markets, with a particular light on the just beginning
Italian market.
JEL Classification: G18, L94, Q41, Q48
Keywords: Electricity, Market power, market prices
1
1. Introduction∗
1.1 In the countries where they were introduced1, power exchanges/pools (hereinafter referred to
as “pools”) were built on very similar technical models. And yet, the regulatory frameworks,
institutional settings and processes implementing them differed. Therefore, their outcomes, in terms
of electricity costs for consumers, price volatility, capability of responding to violent shocks of
demand and of absorbing the exercise of market power by incumbents were different.
The pool model is based on (hourly) auctions for wholesale purchase and sale of electricity.
Every day, this mechanism determines a set of hourly marginal prices from the equilibrium between
power demand and supply; the same hourly price (system marginal price) is applied to all the power
traded in the pool for that hour, physically delivered in the next day2. Only large consumers are
admitted to the pool (retail consumers are excluded).
Yet, the aim of speeding up the liberalisation process and of ensuring market liquidity led
some countries to opt for a mandatory pool3 and to accompany the process with a fast and intense
activity of privatisation and fragmentation of incumbent power-generating companies. Cases in
point were the California power exchange (Cal-PX) and the English pool upon its establishment.
Conversely, other countries activated the liberalisation process through gradual institutional
changes, fostering slow adjustments in public governance of power-generating companies and
leaving electricity operators free to choose between wholesale electricity trading through the pool or
through bilateral contracts; in those countries, liberalisation was associated with the upgrading of
transmission grids - publicly owned and operated - and with the development of regulated financial
markets, complementary to the pool, for the trading of power derivatives in order to hedge the
electricity prices set in the pool; progressively, the grid was reinforced along national borders and
the market was extended to neighbouring countries. A case in point is represented by Norway, the
Scandinavian countries and Denmark, which joined NordPool in the 1990s.
The comparison between Cal-PX and NordPool is enlightening. The Californian pool and
the Scandinavian one responded to exogenous shocks in extremely different ways, with opposite
∗ This paper is part of the research programme “Politiche per la regolazione dei servizi di pubblica utilita’. Gli indirizzi dell’Unione Europea e la riforma del settore energetico italiano”, funded by the Advanced School of Public Administration (SSPA) in Rome, which is gratefully acknowledged. The research was carried out in the period when Valeria Termini was Deputy Chairperson of GME (the Italian Electricity Market Operator) and greatly benefited from internal discussions on market design and market rules to be implemented in Italy. Usual disclaimers apply. 1 Power exchanges/pools , i.e. companies managing the wholesale trade of electricity through the auction mechanism, were introduced by law everywhere, as part of a pervasive process of liberalisation of the electricity industry, which started about a decade ago. 2 In this sense, the electricity market is called “day-ahead market”. In the following paragraphs, reference to the electricity market will imply reference to the day-ahead market.
2
effects on the electricity industry. In the former case, prices rocketed during the Summer/Autumn
crises of 2000, distributors went bankrupt, power supply was cut and the Government had to step in
as a provider of last resort. In the latter case, during the Autumn/Winter crisis of 2002, efficient
price signals from the pool triggered a stabilising response by operators and real flows in the market
were eventually rebalanced.
The scientific and political debate which followed the above events, especially the traumatic
Californian experience, laid the blame on internal pool mechanisms, which were supposed to have
worsened the consequences of the factors of crisis. After California, also England dropped its pool
and created a decentralised trading system (NETA, 2001). By contrast, the pool is growing in
Scandinavian countries, which continue on their liberalisation path, strengthening the day-ahead
market and the complementary market of financial derivatives.
1.2 This research dwells on the differences of institutional “environment” and market design
which yielded the above results. Rigorous scrutiny based on econometric analysis of prices
identifies the impact that each element of the context , had on the performance of the pool, i.e. the
cost of electricity for consumers and the vulnerability of the system. These context elements
encompass: progressive diversification of energy sources; development of regulated financial
markets complementary to the physical market; step-by-step extension of the market and
strengthening of trade relations with neighbouring countries. Co-operative regulation between
different levels of government and gradual change of governance of dominant power-generating
companies are also considered.
After identifying and describing the features of the institutional architecture supporting the
electricity industry in the two countries (§1), the paper analyses (§2) hourly electricity prices listed
daily in NordPool and Cal-PX, from the start of the market in 1992 to 2003 for NordPool, and from
the start of the market in 1998 to the month preceding its closure on 25 December 2000 for Cal-PX.
Such a complete sample made it possible to track the trend of pool prices over time, to discriminate
pre-crisis from crisis periods and to assess the impact that NordPool’s gradual change of
institutional setting had on price level and volatility. Thus, the comparison of the two market
designs was made with the following goals:
• analysing the features of electricity price formation in the pool, which distinguish it from
the one of financial products and other commodities in the respective exchanges (e.g.
absence of arbitrage due to non-storability of electricity), by adapting some explanatory
techniques, applied to financial markets, to the analysis of electricity prices;
3 In other terms, bilateral contracts for the trade of electricity were replaced by the pool.
3
• studying the role and significance, in the dynamics of pool prices, of the institutional
elements identified in the 1st paragraph, which were regarded as particularly significant in
the overall design of the market and which differentiated the electricity liberalisation paths
of Nord Pool and Cal-PX,
• finally, checking the effects of these context relations upon crises in the two countries.
The findings from this comparative analysis give interesting insights also for Italy, where the
implementation of the pool is under way. The problem does not lie in having or not having a pool
(i.e. it does not revolve around the drawbacks and dangers abstractly associated with the pool), but
rather in the context and sectoral policies where the pool operates.
4
2. Market design in Nordic Countries and in California
This section provides a brief comparative illustration of the main features of the market
structure and market rules in the Nordic market and California. We emphasize the aspects that are
more likely to affect the behaviour of spot market prices and the reaction of prices to a period of
crisis.
2.1 Market Structure and market rules in Nordic Countries.
The Nordic area is considered one of the world’s most developed international markets for
electric power. In recent years the trading system has changed dramatically, moving from the old
model of cooperation, under the Nordel agreement among the leading utilities of each country to
competitive market rules. The differences in generation structure have made it economically
attractive to trade power, allowing the Nordic countries to optimise production. This led to the
developing of an electric power trade and explains the establishment of interconnections in
Scandinavia. The shift to an international pool was triggered by power sector reforms in Norway
starting in the early 1990s. Norway paved the way to the creation of the Nord Pool opening up a
spot market in 1992. A similar power market in Sweden would have been difficult to manage, as
Vattenfall and Sydkraft, the two largest generating companies, by then, together controlled about 75
percent of generating capacity. The pioneering energy competition Act in Norway went into effect
on the 1st of January 1991. The Act mandated separation of grid transmission activities from
competitive activities, at least in accounting. The national power company was split in 1992 into the
nation-wide grid company, Statnett, and a generating company, Statkraft. At the beginning the
Norwegian spot market experienced some problems especially since all the power in Norway was
(and still is) produced by hydroelectric plants, and so the spot market price was very volatile. In
January 1996 a decision was therefore made to establish a joint Norwegian-Swedish4 electricity
trading exchange, with a market design based on the Norwegian experience that would address the
problems of both countries. The ownership of the restructured power exchange “Nord Pool” was
equally split between the two national grid operators of Norway and Sweden. Finland introduced
new energy legislation in 1995 and joined the pool in June 1998. In July 1999 the Western part of
4 In Sweden the first step of liberalization started in 1991 and a new Electricity Act allowing a competitive market finally took effect in January 1996.
5
Denmark, were liberalisation moved more slowly because of the power sector’s different structure
and competition was introduced in 1996, became an own price area within the Nord Pool. However,
the vision of a truly pan-Nordic power exchange was realised only on October 1, 2000 when finally
Eastern Denmark was fully integrated into the Nordic market, and all the Nordic countries started
operating in a joint extensive market. The Nordic Electric Clearing House ASA (“NECH”) - wholly
owned by Nord Pool - operates as a commodity-clearing house under the vigilance of the Banking,
Insurance and securities Commission of Norway. On July 1, 2002 it was decided to extend
ownership of Nord Pool Spot market so that in the future the company will be owned, in addition to
Nord Pool ASA, by all TSOs (Transmission System Operators) in Denmark, Finland, Norway and
Sweden. In today’s power system, the five Nordic TSOs co-operate closely on operational and
market issues.
The Nordic Ministers of Energy supported formation of a pan-Nordic competitive power market.
All parties wished to continue the Nordic power industry co-operation through the inter-Nordic
organisation NORDEL. The Nordic wholesale market is characterised by a large number of market
participants and a degree of market concentration that is (almost) sufficient to promote competition.
The decision that large, dominant national companies should not be split in smaller competitive
units but should be maintained to meet challenges in the future restructured European power market
is one of the key factors that influenced the development of today’s unified and largely deregulated
Nordic power market (table 1 shows the Market structure situation for Nordic countries in June
2002). The common Nordic market would reduce the dominance of these large companies.
Table 1 approximately here.
Much of the generating capacity of Nord Pool is fully or partially state-owned. Differently
from England and Wales, where the industry restructuring was driven by the aim to privatise the
electricity supply industry, the corresponding reforms in Nordic countries were primarily motivated
by efficiency considerations. Consequently in the Nordic countries the high degree of public
ownership in the electricity supply industry, which is considerably higher in Norway than in
California and other countries, was essentially unaffected by the electricity market reforms.
Another important characteristic of market structure in Nordic countries is represented by the
source of electricity. Norway relies entirely on hydro (99%), Denmark generates all power in
thermal plants, mainly from imported coal. Over 90% of Denmark’s electricity comes from
conventional thermal plants, mainly from imported coal and combined heating and power (CHP)
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facilities, Sweden has a mix of about 50% hydro and 30% nuclear generation, and Finland a mix of
hydro (25 percent), conventional thermal (45 percent), and nuclear (30 percent) plants. Table 2
evidences that the Nord Pool generation capacity is dominated by hydropower or nuclear power,
technologies that allows to produce electricity at a very low marginal cost. Typically, hydroelectric
generation has a cost of less than 0.5 cents/KWh, compared with about 2-3 cents/KWh for gas or
coal plants. However, hydroelectric plants require creating a large storage reservoir behind a dam
on a river or stream. The shadow price of stored water must be included in the computation of the
total cost. In California, the generating capacity is instead dominated by thermal plants (57%).
Table 2 approximately here.
The markets of Nordpool consist of the wholesale spot market, Elspot, which is non-mandatory and
competes with bilateral markets where contracts can be tailored to the needs of the parties involved,
and of the financial market (Eltermin and Eloption, 3 year horizon), with futures, forward and
options, that competes with OTC market for financially settled power contracts. It is characterised
by transparent spot prices and price forecasts via forwards and futures, within a time horizon of up
to four years.
On the Daily Power Market (DPM) or Spot Market, fixed quantities of electricity are traded on a
day-ahead basis for 24 hours. Only a small fraction of the electricity produced is sold through the
spot market. The market share of the Nordic Power Exchange’s spot market is currently
approximately 30 % of total annual Nordic consumption of electricity. On the DPM generators
submit their bids on a day ahead basis. A market for within-day electricity (regulation Power
Market in Norway and balancing market in Sweden) compensates differences between planned and
actual consumption and maintains system integrity. Participants can submit their bids for each hour
the next day until 12 hours before the market opens. Consumers’ supply obligations must be in
balance with their own generation, bilateral contracts purchases and spot market purchased. The
market clearing price or system price is calculated at the intersection of the curves obtained
grouping together all the bid and offers. The price setting process has a geographic dimension:
bottlenecks between two geographic areas result in different price or bidding areas. The differences
in prices between the bid areas arise when transmission constraints are binding, leading to higher
prices in deficit areas and lower prices in surplus areas. Transmission constraints are generally rare
and very small, and so are deviations from the system price. The regulatory oversight of Nordic
Power Market is responsibility of the Norwegian Water Resources and Energy Administration
(NVE), which is also responsible for monitoring grid operations and setting distribution tariffs in
7
Norway. Starting in 1997, NVE changed tariff regulation from cost-of -service to price cap. In
1995 the Weekly Power Market that sold forward contracts for physical deliveries was transformed
into a futures financial market with contracts ranging from one week ahead to three years ahead.
Differently from forward contracts, Futures Contracts have daily mark-to-market cash settlement,
are standardised contracts (the smallest quantity traded is 1 MW) and are generally listed for shorter
delivery periods (days, weeks and blocks). Financial contracts have the System Price as underlying.
Nord Pool also lists a forward called Contract for Difference (CfD), which is a forward on the
difference between the System Price and the different area prices. This instrument enables a perfect
hedge for contracts with physical delivery in their respective area prices. The freedom to choose
counterparts and products, the presence of a liquid power exchange, the presence of hedging tools
and the co-operative attitude of transmission system operators in facilitating trade operations, are
among the main factors that contributed to the success of the Nordic power market.
As for the Retail Market, the Nordic power market is now a competitive one, open to all
categories of electricity buyers. Denmark is opening its market in stages; the opening will be
completed by 2007 in accordance with EU directives. Small-scale end-users, such as homeowners
and apartment renters can choose among retail suppliers and contract types such as standard
contracts, where the price may be changed at short notice, one or two-year fixed price contracts;
spot contracts, based on the spot price plus an uplift, and without any price cap; price cap contracts,
based on the spot price, plus an uplift, but subject to a price cap. All power retailers who serve
small-scale end-users are committed to making prices available to the public. Accordingly, retailers’
prices are listed on Internet.
2.2 Market Structure and market rules in California
Before the restructuring program, California’s electricity industry was dominated by three regulated
private vertically integrated monopolies (investor-owned electric utilities, IOUs). The market
regulation was split between an independent agency, the California Public Utilities Commission
(CPUC), primarily responsible for regulating retail prices and services, and the FERC (Federal
Energy Regulatory Commission), responsible for regulating prices and other services condition of
“wholesale” power transactions. In 1993, high electricity prices and the broad agreement on the
need to reform the industry structure and regulatory system induced the CPUC to articulate a reform
program for the electricity sector that was published in a report known as the “blue book”. The
reform programme was refined in 1996 under the restructuring law AB 1890. IOUs were required to
provide open access to their transmission and distribution networks at prices determined by FERC
8
and CPUC. California's restructuring legislation provides an accelerated recovery of the IOU
“stranded” investments through a Competition Transition Charge, or CTC. The CTC varies by
utility and is included in customers’ bills (in all customers bills by June 1/1998). It is determined by
multiplying a CTC rate by electrical energy consumption. If there were no transition to a
competitive market, customers would continue to repay these costs through their normal electricity
bills and electricity rates would not rise from current levels.
The generating resources of California are a mix of gas, nuclear, hydroelectric, coal and long term
contracts with Qualifying facilities (QFs) (see table 3).
Table 3 approximately here
The three original utilities where required to divest their power plants that used fossil fuel to
generate electricity to private firms, At the end of the process, about 54% of the electricity
generation capacity in California was provided by thermal (fossil fuel) generating technology, and
the remaining by two nuclear plants and a large number of hydroelectric units primarily owned by
PG&E.
The structure of the market mainly consisted in seven firms, five larger and very similar in size and
two smaller and a variety of small independent plants. These firms together own the 54% thermal
production (see table 4).
Table 4 approximately here
Despite the entry of new generating capacity was deregulated, the process for obtaining the siting
approvals from CEC (California Energy Commission) and local authorities was not reformed and
remained slow and inefficient. The uncertainty about the new rules under which new power plants
would be built precluded the completion of new generating capacity.
To manage congestion California has adopted a zonal system that allows separate market clearing
prices and ancillary services prices in Northern and Southern California. The competitive wholesale
and retail electricity markets began operating in April 1998. The preference and the discussions on
the design of the wholesale market framework were divided between a model similar to the British
Pool, and a “bilateral contracts” model. The final design of the market was the result of a series of
9
compromises. The original utilities responsible to serve default service consumers were required to
purchase their electricity from the power exchange. Other demand-serving entities and other
generators can choose whether to trade in the PX or not. Utilities were restricted or either denied to
hedge their position by the CPUC. The restructuring design required the IOUs to create two new
non profit corporations: the California Independent System Operator, (CAISO) that would operate
the transmission networks owned by the IOUs, and the California Power Exchange (PX). The PX
operates day-ahead hourly auction markets and hour ahead for wholesale electrical energy. The PX
determines the hourly market-clearing price by the intersection of aggregate supply and demand
bids and all trades are concluded at this uniform market price. Differently from other organized
markets, the ancillary services market (market for reserve services) is separated by the day-ahead
energy market and is operated by CAISO. CAISO is responsible for balancing supply and demand
of energy in real time and for generating capacity that can be used to manage congestion.
Wholesale market prices would not be technically deregulated, but would be “market based”. FERC
would approve wholesale price only if they are “just and reasonable”. In 1998 Price caps were
imposed on both prices for energy and ancillary services to respond to a variety of market
imperfections. Until July 2000 there was a $750/MWh cap on prices in the real time market, that
became effective also on the day ahead prices in the PX. This cap was reduced to $500/MWh
during July and to 250$/MWh in early August. The caps were binding during many hours of August
and September 2000. The reform proposed an industry structure in which wholesale market was
deregulated and retail consumers were left the choice of using this new competitive wholesale
market, choosing a competitive electricity service provider (ESP) or continuing to receive “default
service” from their local utility distribution company (UDC) at prices determined by the CPUC.
This price should be equal to the wholesale spot market prices determined in the day ahead and real
time markets adjusted for physical losses, plus avoidable billing and metering costs. The
assumption and the rationale for the reform was that wholesale prices would be lower than the
regulated retail price and that the consumers could soon have access to this cheaper power. The PX
stopped operating after January 2001.
2.3 A comparison of Nordic market and Californian market
The brief description of the main features of the Nord pool’s and California’s electricity markets
help us to identify similarity and differences in market design and market structure in the two
countries that are likely to led to a different behaviour of market prices and on the response of
prices to a market crisis.
10
One of the major differences between the two markets relies in the electricity sources: the Nordic
market is dominated by hydropower or nuclear power and California by thermal power.
Hydropower has the advantage that it allows producing electricity at a very low marginal cost; in
turn, the high dependence on this technology is one of the main causes of seasonal variations in spot
market prices and of high volatility of market prices. The possibility to store water allows reducing
this volatility by regulating the flow of water between wet and dry periods and maintaining in dry
period higher generation that the unregulated stream flow would produce. However, the storage
volume of a dam is fixed and as long as it is less than the water required to satisfy the demand of
electricity during all the periods, there is a constraint on the supply of energy.
Another important difference is that Nordpool has an organised financial market. This market has a
double role: on one side, it allows operators to hedge electricity prices and to protect against volatile
price spikes. On the other side, it reduces the incentive of generators to exercise market power (see
Green ,1999, and Wolak, 2000). The possibility to hedge spot market position on the futures market
prevented most Nordic countries from declaring bankruptcy, limiting the spreading out of the crisis.
In California the use of hedging tools was very narrow if not explicitly denied by the regulators (at
the time of the crisis the retailers were forbidden from buying electricity more than one day ahead).
As the financial state of the largest utilities became less certain, many power companies were going
unpaid and became hesitant to sell power to them. This started a vicious circle that led many firms
to declare bankruptcy.
About the ownership structure of the industry, much of the generation capacity in Nordpool is fully
or partially state-owned while in California private companies own much of the capacity. The final
important difference between the two Countries is that while trading on Nordpool market is non-
mandatory, in California the PX is only in part a voluntary Pool: consumers are free to choose
whether to buy through a competitive supplier or to receive the “default” service at a regulated
price, while utilities are obliged to buy power for retail default consumers in the PX. The shift of
consumers to ESPs was significantly lower than expected and the utilities where left the duty to
provide “default service” and to purchase on spot market for about 88% of electricity demand. A
consequence of this is that while in California during the summer 2000 the bulk of the energy was
traded in the spot market, in the Nordic Power Exchange’s spot market is traded less than 30% of
electricity.
2.4 Origin of the crisis in California and Nordpool.
11
In summary, the main reasons vastly discussed by the literature to explain the high level of prices
observed during the Californian crisis are: increases in gas prices, the large increase in electricity
demand mainly due to abnormally hot weather in May and June and strong economic growth,
reduced availability of power imports and higher prices for emission permits (Nox permit prices
increased marginal costs by $30 to $40/Mwh for a gas fired unit and by $100 to $120 Mwh for a
peaking turbine)5. The difference of the California experience with respect to electricity crisis
observed in other countries is that it was not a transient phenomenon. During summer 2000
wholesale electricity prices became 500% higher than in the same months in the two years before,
and the effect of the crises did not disappear with the end of the hot season but lasted in mid-June of
the following year. The high demand and tight supply conditions increased the opportunity and the
profitability for operators to exercise market power: during high demand conditions withholding a
relatively small amount of production from the market can have a very large effect on market
prices. Joskow and Kahn (2001) suggest that about a third of the wholesale price realized between
may and September 2000 is attributable to market power. All these problems were aggravated by
the shortcomings of market design, in particular the existence of an asymmetric regulation for
wholesale and retail markets and the constraints in the use of hedging tools. The asymmetric
regulation was in part the consequence of the existence of two different regulators and of a lack of
coordination of their activity. The electricity utilities had to purchase in a volatile wholesale market
all electricity demanded by consumers who did not choose a competitive supplier and sell it to them
at regulated, fixed prices that were not linked to costs. Wholesale prices prevailing in summer 2000
were much higher than retail prices and the fraction of consumers who switched to ESPs was much
lower than expected. Being insulated for movements in wholesale market prices, consumers had no
incentive to reduce demand as spot prices raised. The increase in prices did not stop as the demand
fell at the end of the peak season. The utilities found it difficult to adjust their financial situation,
aggravated by the scarce use of long term fixed price contracts and hedging tools6, which could
have protected them from price volatility and reduced suppliers’ incentive to exercise market
power. Supply shortages persisted also because of “true” or “strategic” plant outage (Joskow and
Kahn (2001) shows that the plants being out of services was only partially attributable to the hard
work of summer or to the need of being modified according to new environmental requirements).
The price of gas was still high (forward prices for natural gas for the summer months raised to
$500-$700/Mwh) and the imports where still low.
5 For a more extensive description of the causes of the crisis see Joskow (2001) and Puller (2001). 6 Until 1999 utilities were not allowed to hedge by contracting to buy market power; forward contracting was relatively small until 2000.
12
In Nord Pool the increase of market prices was triggered by severe autumn/winter weather
conditions that decreased water reserves to abnormal levels - i.e. in December 2002 hydro reserves
fell to 52% in Sweden, compared to the usual level of 75%; reserves fell to 60% in Norway,
compared to the usual level of 80% -. The consequent decrease in generating capacity was
worsened by exceptional net exports recorded by Scandinavian countries for the whole year. On the
other hand, weather conditions were raising the demand for electricity for heat purposes. Excess
demand pushed Pool prices to unprecedented values; in three months wholesales market prices
increased by 300%, reaching a peak of 103,65 Euro/MWh in December-January 2003.
However, in contrast to what had happened in California, in Nord Pool different institutional
factors played a stabilizing role. First of all, price spikes in Nord Pool did not reveal specific and
widespread exercise of market power by the state-owned large generating companies, less driven by
profit maximizing objectives than Californian generating companies; this is witnessed by the Fair
Trade Inspectorate and Water Resources and Energy Administration (NVE) reports on the crisis.
The organized financial market of Nord Pool (Eltermin) had supplied operators with financial tools
to hedge electricity prices and to protect their positions against price spikes from the beginning of
the crisis; this also reduced the incentive of generators to exercise market power.
Moreover, in contrast to the conflicting roles between regulators occurred in California, in
Nordic Countries regulators, incumbents, market operators and the Government acted cooperatively
to overcome the crisis. No asymmetric and invasive regulation was hindering the effects of price
signals to the market. Operators responded to price signals both on the supply and demand side of
the market. Supply increased as a reaction to high prices –i.e. in December grid links with Russia
and Finlandia were upgraded; in January, net imports sharply raised from neighboring countries.
Furthermore, large electricity consumers, in the iron and silicon sector in particular, decreased
silicon production during the winter, thus reducing their demand for power; conversely they sold on
the Pool the power they had produced for self-consumption. Fuel carbon plants increased their
power production in December, confirming the relevance of differentiating power sources.
In February/March power flows in the market were eventually rebalanced; accordingly, pool price
decreased. The possibility to hedge spot market positions on the futures market had prevented most
Nordic operators from declaring bankruptcy, limiting the spreading out of the crisis.
3. Data Analysis
13
This section describes the behaviour of spot electricity prices in California and Nordpool, with the
purpose to evidence the main time series properties with particular concern to a period of crisis.
We would attempt to relate differences in the several dimension of the behaviour of prices between
Northern Countries and California to difference in market design of the two markets.
The data used in this study consists of daily prices from Nord Pool and Call PX obtained as an
arithmetic average of the 24 hourly electricity prices determined every day through the mechanisms
described in previous sections. Nord Pool prices are expressed in NOK/KWh, and California prices
in $/KWh. Volumes of trades are obtained as the daily sum, over the 24 hours, of the quantities of
electricity traded expressed in KWh.
The whole sample period for Nord Pool prices is from May, 4th 1992 to April 9th 2003. We define
the crisis of Nord Pool to be the period from November, 20th 2002 to January, 31st 2003.
The Cal-PX data sample is from July, 6th 1998 to December, 25th 2000. Observations after
December 25th have been discarded because, due to insolvency of the IOUs, the California
Department of Water resources was forced to intervene as a buyer of electricity thereby altering the
market conditions. We split the California electricity crisis into two stages: the summer crisis, from
may, 16th 2000 to September, 30th 2000 and the winter period in which prices remained
significantly high, from November, 10th 2000 to December, 25th 2000. In presenting summary
statistics, the sample has been divided in several sub periods: the pre-crisis period, from the
beginning of the sample to the data indicate for the beginning of the crisis, the 1 year before crisis
period, starting from the year before the beginning of the crisis, on the same calendar day (this
period allows for a more accurate comparison between the pre-crisis and the crisis period,
accounting for the lack of homogeneity in the length of the data samples) and the crisis period.
When presenting summary statistics by seasons to control for seasonal effect, we define Winter to
be the period from December to February, Spring from March to May, Summer from June to
August and Fall from September to November.
3.1 A comparison of distributional and temporal Spot electricity prices in Norpool and
California
This section discusses the distributional properties and the behaviour of electricity prices in
California and Nordpool. Summary statistics on electricity prices are produced for several
subsamples, in order to compare the behaviour of prices between the pre-crisis and crisis period and
to capture seasonal patterns.
14
Table 5 shows that both mean day-ahead prices and variation coefficients are sensibly higher in
Cal-PX than in Nordpool. The increase in electricity prices due to the crisis was significantly higher
in California that in Nordpool. Figure 1 and 2 also show significant differences in the pattern of
electricity prices in the two markets around the period of crisis. Figure 1 shows that the increase in
Nordpool prices in the first stage of the crisis was gradual, differently from the increase of
Californian prices that was almost instantaneous and not predictable. Figures 1 and 2 evidence that,
unlike the Nord Pool price spikes experience, the California crisis has not been a transient
phenomenon of a limited duration, but a persistent series of events lasting from May to September
with prices that remained remarkably high in October and November and raised again to
unprecedent levels during December 2000. Futures prices can have contributed to the slow pattern
of price increases in Nord Pool. This result seems to find support in the behavior of Nordpool
futures prices and volumes in the period immediately before the crisis and in the period of crisis
presented in Figure 3 and 4. These figures show a slow increase in future prices and volumes before
the crisis and in the first period of crisis. On contrast, the scarce use of futures contracts or other
hedging tools is likely to be one of the reasons for the high persistency of California crisis.
Table 6 presents some summary statistics of NordPool and Cal-PX day-ahead daily prices and
volumes across seasons. In California the demand is particularly high during the summer months,
when air conditioning is needed. The opposite occurs in Nordic Countries, where the demand is
greater in the winter period, reflecting heating needs.
Table 7 shows statistics on volatility and the different pattern of volatility across seasons. As
mentioned above, the high dependence on hydropower is one of the main causes of seasonal
variations in Nord Pool spot market prices and the possibility to store water can only partially
shrink the high volatility of dry periods. The table also evidences that the volatility of Cal-PX prices
was significantly higher than the volatility of Nordpool prices for all sub samples, and notably
during the crises7. Figures 5 and 6 show the autocorrelation functions for the level of log prices for
Nordpool and California. These figures clearly evidences the seasonal pattern. Figures 7 and 8 are
restricted to a smaller number of lags to better evidence the presence of intraday and week end
cycles. Figures 9 and 10 plots the autocorrelation function for the square of returns for Nordpool
and California, and evidences volatility clustering and a high degree of persistence even after a
significant number of lags.
These preliminary results confirm some characteristics of electricity prices (Knittel and Roberts,
(2001).
7 Difference in means tests are all significant at 99%.
15
The behaviour of electricity prices presents some similarity but also significant differences from
other equity prices and commodity prices. Electricity prices differ from that of other commodity
markets, principally because electricity is not storable and standard arbitrage arguments do not
apply to this market. As equity prices, electricity prices show a high kurtosis and persistence in the
square of prices. However, electricity prices present several distinguishing characteristics, as a
degree of persistence in both the price level and squared prices higher than other commodities
prices, and a stronger seasonal component.
As it will be discussed in further detail below, the results also seem to be consistent with some
expected outcomes associated to differences in market structure and market rules between the two
countries (see Wolak, 2001).
3.2 A model for Cal-PX and Nordpool electricity prices
This section rep
Having detected conditional heteroschedasticity effects in the error term, we chose to apply to the
available data a model belonging to the ARMA-GARCH family8. The equation for the mean reads:
tt LXyL εθαφ )()( += (1)
ty
(
is an n-dimensional vector (of log-prices or log-returns), where n is the length of the time series.
)Lφ and )(Lθ are stationary polynomials in the lag operator L, which account for the
autoregressive and the moving average structure of the data, respectively. The orders of such
polynomials are selected according to a general-to-specific procedure.9 Using the Augmented
Dickey Fuller test on daily log prices after controlling for the crisis period, the null hypothesis of a
unit root is rejected at all standard significance levels for both Cal-PX and Nordool log-prices. The
ADF statistic is –8.1082 for Cal-PX log-prices and –7.3275 for Nord Pool log-prices and the 1%
8 As a preliminary exercise, we have fitted simple ARMA models, based on an underlying assumption of homoskedasticity of the error term. However, Arch and Ljung-Box tests tend to reject the null of white noise residuals. 9 We have started from the most general specification, including all the exogenous regressors and up to 7 lags of the ARMA component (to take weekly stochastic patterns into account). Then, the specification has been gradually simplified on the grounds of likelihood criteria. More information is available from the authors upon request.
16
critical value is –2.56810. We refine the basic model specification including exogenous variables
that allow to account of several factors that we expect to have a significant impact on the behaviour
of electricity prices and volatilities.
X is the n-by-m matrix including these m exogenous regressors, that include daily and seasonal
dummies, a linear trend, dummies accounting the periods of crises and structural and institutional
change and, only for the Nord Pool specification, binary variables that allow capturing the impact of
the introduction of a futures market (Futures), and four binary variables that capture the effect of
the entrance of the 4 Countries that joined the pool after its creation, Sweden, Finland and Western
and Eastern Denmark (indicated as West Den and East Den). α is the associated m-dimensional
vector of parameters. The error term, tε , is assumed to be a zero mean process with a time-varying
variance , which dynamics is modelled as follows: 2tσ
22 )()( tt LXL ερβσγ += (2)
with )(Lγ and )(Lρ stationary polynomials in L, and β the m-dimensional vector of parameters
associated to the exogenous regressors.
The parameter estimates of the two models are presented in tables 8 and 9. In the Cal-PX model
specification the impact of the crisis is captured by two binary variables, corresponding to the two
stages of the crisis discussed in the previous sections (summer and winter). To avoid collinearity,
the daily binary variables do not include Sunday. Cal-PX model estimation results, presented in
table 8, show a high correlation between the current price and the price of the day before, and a
significant correlation between the current price and the two days ahead price and one week before
price. After controlling for seasonal and other effects the variable that captures the impact of the
crisis had a significant and positive impact both on electricity prices and volatility. The increase of
electricity prices was, on average, higher during the second stage of the crisis, the “winter crisis”,
than in the first stage of the crisis. The day-of the week effect is significant from Monday to Friday.
This result confirms that, despite differently from financial markets trading occurs also on Saturday
and Sunday, a “week end effect” exists also in electricity markets. In analogy with financial
markets, the volatility is higher on Monday. All the four seasonal dummies have a significant
impact on the conditional variance while none of them has a significant impact on the mean. The
relatively lower negative value of the summer coefficient supports the hypothesis that the
10 We ran different specifications of the test and the results are unchanged. The null of a unit root is rejected at all standard significance level.
17
conditional volatility of prices is higher during summer months. The high and significant GARCH
effect indicates a high persistency of volatility.
Table 9 shows the estimates of the Nord Pool electricity prices model. Consistently with the results
obtained from the estimation of the Cal-PX model, the coefficient of the crisis binary variable is
positive and highly statistically significant both in the mean equation and in the variance equation.
However, according with statistical results discussed above, the impact of the crisis on the volatility
of prices seems sensibly lower in Nord Pool than in California. The negative sign of the Futures
variable is consistent with the hypothesis that the introduction of a futures market has reduced the
volatility of spot electricity market prices. A similar effect has been obtained by enlarging the
dimension of the Pool favouring the creation of an integrated Nordic Market that reduces the
dominance of large companies and facilitates trade operations among countries allowing for a
diversification of different generating mix. The entrance of the different countries that joined the
Pool seems to have significantly reduced also the level of log prices. This result is true for all
Nordic countries with the exception of Sweden. This finding can be explained as follows. Sweden
was the first country to join the pool, and its generation capacity was so similar to Norway’s
(mainly based on hydroelectric and nuclear capacity), that this integration lead to very low benefits
from generating mixes diversification. Secondly, at the time the Sweden joined the Pool, its market
structure was very concentrated: the two largest generating companies together controlled a
significant share of generating capacity. The full effects of creating a common market become
visible only later, when the other Nordic countries joined the market. All seasonal dummies have a
highly significant impact on market volatility, but the results do not evidence a significant
difference of this impact among seasons. Winter is the only season to have a positive impact on the
level of prices, but this result is not statistically significant. All day of the week’s coefficients are
highly statistically significant, indicating higher level of prices during trading days (particularly
during the first days of the week). Results from Nord Pool prices confirm the existence in the
electricity market of a week-end effect that is typical of financial markets, with higher level of
volatility on Monday. Differently from Cal-PX estimates, Nordpool estimates do not evidence the
presence of volatility persistency, as evidenced by the non-significant effect of the Garch parameter.
The correlation of prices with the first two lags is high and significant.
4. A comparison between Nordpool and Cal-PX prices behaviour and possible connection to
specific market features.
18
The purpose of this section is to relate difference in the distributional properties and in the
behaviour of Nordpool and CAL-PX electricity prices to the main differences in the market
structure and market rules of the two markets. Results described in the previous sections supports
some main expected outcomes associated to specific features of the markets.
Differences in the mix of generation technology -The first difference between California Cal-PX
market and Nordpool we expected to have an impact on the behaviour of market prices is the
difference in the mix of generation technology. We expect this characteristic to affect both the mean
and the volatility of market prices. As expected, mean prices are higher in California, the market
dominated by the most expensive fossil fuel technology. Prices in this country also tend to be much
more volatile than in the market dominated by hydroelectric capacity, Nordpool. Although the
supply of energy sources to hydroelectric systems is much more sensitive to weather conditions
than to fossil fuel systems, the possibility to keep reserves of water can be an explanation to less
volatile prices. However, the lower level of volatility in the Nord Pool relative to California finds
further explanation from the analysis of the impact of other features of the two markets.
Also, as evidenced above, the presence of a futures market reduces the possibility for generators
that cover their position to profit from electricity withdrawals. At the same time it protects
electricity purchaser and distribution companies from increase of prices.
Another explanation of the lower level of volatility of Nordpool prices with respect to California
prices during the crisis can be attributed to the presence of a bilateral contracts market and to the
increase of arbitrage activity between bilateral contracts and spot markets during the crisis.
Mandatory pool versus optional day ahead market – The finding that the volatility of the mandatory
pool (as in part is that of California) is higher than that of the voluntary Nord Pool is consistent with
the results obtained from Joskow and Kahn, 2001. The authors observe that in non-mandatory pools
electricity purchasers are ready to shift to bilateral contracts if spot market prices become too high.
Consequently, when market prices are relatively high many bilateral contract purchasers would be
willing to sell in the spot market. The elasticity of the demand faced by generators increases,
keeping down price increases. The presence of bilateral contracts also reduces the possibility to
exercise market power and favours the financing of new plant, guaranteeing the financier on the
future earnings of the generation company.
Ownership structure of generating companies - As illustrated in the previous sections, another
relevant difference between Nord Pool and California is that Californian market is dominated by
privately owned companies while the majority of generation companies of Northern Countries are
state-owned. As discussed above, price volatility is likely to be the result strategic attempts to
exercise market power. Price crisis increases the possibility to exercise market power successfully
19
in markets that are prone to market power. Since generally state-owned firms have objectives
different from maximizing profits, we expect the willingness of the generating companies to
exercise market power to be significantly higher in California than in Nord Pool.
Existence of a regulated financial market - the existence in the Nordpool market of an efficient
financial market that protected utilities from financial problems, may contribute to explain the
lower persistency of the effect of the crisis observed in this market than in California. Hedging
tools prevented firms to declare bankruptcy or to incur in difficulties in obtaining power from other
companies so reducing the persistency and the extension of the crisis. In California the regulatory
authorities did no allow distribution companies the use of hedging tools. Financial futures also
reduce generator’s incentive to exercise market power, and could be an explanation of limited
increases in volatility during the crisis. Finally, the signalling properties of future prices favour the
quick diffusion of information regarding the behaviour of spot prices. Futures prices can have
contributed to favour the slow pattern of price increase during the crisis..
Features of the markets that facilitate Market power
Empirical evidence supports the hypothesis that California generating companies are more prone to
exercise market power than Nord Pool companies. The difference in the ownership structure is not
the only reason for this conclusion. Most of the literature that analyses the California crisis provides
evidence of the exercise of market power and proved it was one of the main explanations of the
magnitude and persistency of the crisis (Joskow and Kahn 2001, McCullough, 2000). Imports could
not help to increase electricity supply and reduce market power, also because California generation
companies controlled some of the companies that exported electricity to California. Hjalmarsson
(2000) performed an econometric study of market power in the spot market of Nordpool and could
not reject the hypothesis of perfect competition for this market. The most likely reason for this
absence of market power in the spot market of Nordpool is ascribed from the authors to the low
concentration in generation and the presence of a common Nordic electricity market that reduces
the dominance of large companies. The higher level of electricity imports of Nordpool and the
presence of a futures market that reduce the incentive of generators who cover their spot market
positions to withdraw capacity to increase market prices are further elements that contributes to
explain the difference in the possibility to exercise market power in Nord Pool and California.
Although this study does not test directly for the presence of market power abuse, electricity mean
prices and volatility of California higher than in Nordpool in the period of crisis and the higher
persistency of the crisis in California are consistent with the hypothesis of a lower exercise of
market power in Nordpool.
20
5. Conclusions
In many Countries deregulation in electricity sector went together with the introduction of a
wholesale electricity market. However, the events in California and the failing of other markets
raised doubt on the effective capacity of these markets to support the restructuring process and to
the potential for beneficial effects of spot markets on electricity prices. A number of studies argue
that the problems that lead to the failure of some electricity spot markets are not evidence that these
markets should be avoided but of the inadequacy of the whole electricity market structure and
regulation. Empirical evidence shows that the problems in England and Wales and California were
mainly due to market power. Comparing the behaviour of prices of two electricity markets,
California and NordPool, with a particular focus on a period of crisis, this work analyses the impact
of different features of market design and market regulation on the performance of the wholesale
electricity market. Although this study does not directly test for the presence of market power, its
finding provide some insights on the relationship between market design and market power.
The examination of the behaviour of prices in the two markets evidence some similarities and some
difference respect to other commodities and financial prices. In common with financial markets, we
find the presence of skewness and kurtosis in the distribution and of a weekend effect. Respect to
other markets, electricity prices show a higher persistence in price level and squared price and
present stronger seasonal effects.
Empirical results evidence some features of electricity markets that seems to facilitate the success of
wholesale markets. These include: allowing bilateral trading to go along with central trading;
favouring the development of a financial market that insulated the utilities from the impact of their
output and input prices and reduce the incentive of generators to exercise market power; favouring
structural policies able to enhance competition between generators or to reduce incentive to exercise
market power (structural separation, control of concentration, ownership structure or corporate
governance rules); enhance the use of a diversified generating mix and the storability of electricity;
favouring cross-border cooperation and transmission links.
Bibliografia
Competition Commission, 2001, AES and British Energy: A report on references made under
section 12 of the Electricity Act 1989, available at http://www, competition-
commission,org,uk/reports/453elec,htm
21
Green, 1999, The electricity contract market in England and Wales, The Journal of Industrial
Economics, vol, XLVII, n, 1,
Knittel, Ch. And M. Roberts, 2001, An Empirical Examination of Deregulated Electricity Prices,
Joskow P, and E, Kahn, 2001, A quantitative Analysis of Pricing Behavior in California’s
Wholesale Electricity Market During Summer 2000, The energy Journal, Vol, 23, No, 4,
Joskow P, 2001, California’s Electricity crisis, NBER working Paper n, 8442,
McCullough, R,, Tsunami: Western Power Market Prices since May 22, 2000, presentation at
Energy Market Report Conference, Portland, OR, October 12, 2000,
Puller, S, L,, 2001, Pricing and Firm Conduct in California’s deregulated Electricity Market,
POWER Working Paper n, PWP-080,
Newbery, David M (2002) “Problems of liberalising the electricity industry,” European Economic
Review 46 (4-5): 919-927
Cambridge Energy Research Associates, (“CERA”), (2002) Market Power in Power Markets:
Restructuring in Nordic and Northern Europe and Use of Concentration Measures.”
Wolak, F. A: 1997, Market Design and Price Behavior in Restructured Electricity Markets: An
International Comparison, mimeo, Power Working papers, available from:
http://www.ucei.berkeley.edu/PDF/pwp051.pdf
Wolak, F, A, 2000, An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior
in a Competitive Electricity Market, Working Paper, Stanford.
Wolak, F. A. and R. H. Patrick, 1997: The impact of market rules and Market Structure on the Price
Determination Process in the England and Wales Electricity Market, Power Working Paper,
available from: http://www.ucei.berkeley.edu/PDF/pwp047.pdf
22
APPENDIX
Table 1- Market structure by company and by zone in Nordic countries (June 2002)
Market
shares %
Denmark
East
Denmark
West Finland Sweden
Norway
South
Norway
North
Elsam 37,9 0,7 2,1
Energi E2 61,3 0,0 0,0 4,5 0,0 0,0
Fortum 5,3 0,7 28,1 16,4 1,8 4,4
TXU 2,4 0,1 0,0
Norsk
Hydro 0,9 0,4 7,0 0,3
Statkraft 0,3 4,8 0,3 6,2 38,5 34,1
Graninge 0,5 0,1 1,0 1,5 0,2 0,4
Sydkraft 4,0 0,6 1,7 11,3 1,3 3,1
Vattenfall 13,7 1,9 6,5 40,4 4,6 10,6 Source: Cambridge Energy Research Associates, Inc, and refer to the market situation on June 2002
Table 2 - The structure of generation capacity in Nordic Countries (2001)
Country Generation (%) Norway Sweden Finland Denmark
Total
Hydro 99,2 49,7 18,3 54,9 Thermal 0,8 6,3 50,7 88,9 20,4 Nuclear 43,7 31,0 23,5 Renewable 0,3 11,1 1,2 Total 31,5 40,8 18,4 9,3 100
Source: Nordpool
Table 3 - The structure of generation capacity in California (2002)
Generation (%) Natural Gas 43,4 Nuclear 16,4 Coal* 13,3 Large Hydro 12,7 Oil 0,3 Renewable 13,9
23
Total 100%
Source: CEC
Table 4 - Thermal market Structure in California
(57% of total generating Capacity)
Firm Capacity (MW) % Capacity
AES 3921 22%
Reliant 3698 21%
Duke 3343 19%
Southern 3130 18%
Dynegy 2871 16%
PG&E 570 3%
Thermo Ecotek 274 2%
Source: CEC
Table 5 - Summary statistics of spot price of electricity per KWh in Nordpool and California*.
Period Mean - NOK (USD)
Std,dev - NOK (USD)
Variation Coeff. Skewness Kurtosis
Nord Pool Whole sample 04/05/92-
09/04/03 149,260 87,158 0,584 2,2847 13,771
Before crisis 04/05/92-19/11/02
139,448 65,744 0,471 0,6951 4,361
1 year before crisis 20/11/01-19/11/02
166,012 49,804 0,300 1,268 4,821
Crisis 20/11/02-31/01/03
506,984 154,510 0,305 0,475 2,107
CalPX Whole sample 06/07/98-
25/12/00 502,217 (60,694)
727,245 (87,890)
1,449 5,822 54,489
Before crisis 06/07/98-15/05/00
245,380 (29,477)
90,237 (10,844)
0,368 2,155 9,758
1 year before crisis 16/05/99-15/05/00
261,677 (31,489)
81,354 (9,793)
0,311 1,768 7,993
Summer 2000 16/05/00-30/09/00
1084,239 (119,318)
669,621 (73,699)
0,618 1,122 3,829
Winter 2000 10/11/00-25/12/00
2803,736 (309,993)
1944,477 (214,995)
0,693 2,490 8,859
Day-ahead prices, daily arithmetic averages, Means and standard deviations are expressed in Norwegian NOKs currency. Mean and standard deviations of California prices are converted to
24
NOKs using the arithmetic average of the daily exchange rate at the beginning and at the end of the corresponding period. Home currency values are in parenthesis.
25
Table 6 - Summary statistics of NordPool and Cal-PX day-ahead daily prices and volumes across seasons. Average prices
(home currency) Std. Dev. prices (home currency)
Average volumes Std. Dev. Volumes
NordPool Seasons (crisis excluded) Winter 163,719 47,947 254941.36 75761.23 Spring 141,041 69,032 225454.31 71966.96 Summer 110,196 70,440 181370.59 40988.27 Fall 143,112 66,485 218807.72 72081.69 crisis included Winter 192,507 111,456 275930.61 86594.74 Cal-PX Seasons (crisis excluded) Winter 26,756 7,979 497187.72 33111.05 Spring 28,229 17,908 480641.02 26380.77 Summer 32,014 12,599 600785.32 60051.60 Fall 34,177 13,013 541073.33 45378.04 crisis included Winter 72,581 151,477 493561.96 34759.12 Fall 65,624 53,669 533114.65 43648.75 Summer 69,738 70,122 592388.07 52933.69 Means and standard deviations are expressed in home currency per MWh (CalPX units= $/ MWh; Nordpool units=NOK/MWh), Winter is from December to February, Spring is from Mar to May, Summer is from June to August and Fall is from September to November,
26
Table 7 – Summary statistics of monthly historical volatilities of log-prices.
NordPool Cal-PX
Mean Std.Dev Mean Std.Dev
Whole sample 0.1511 0.1246 0.2525 0.1541
Winter 0.1119 0.0453 0.1536 0.0950
Spring 0.1348 0.0638 0.1884 0.0293
Summer 0.1757 0.0879 0.4158 0.1648
Fall 0.1167 0.0556 0.2409 0.0174 Before crisis 0.1502 0.1256 0.2026 0.1053 Crisis 0.2269 0.0684 0.5111 0.1582 Crisis (Winter) 0.4273 0.0814 Hystorical volatilities of log prices are daily values obtained using a fixed window of 30 days. Average seasonal values are calculated over the whole sample. Winter is from December to February, Spring is from Mar to May, Summer is from June to August and Fall is from September to November.
27
Table 8 - Parameter estimates of the CAL-PX pricing model specification. Dependent variable: day ahead daily log prices. Sample: 7/08/1998 12/25/2000
Parameter Coefficient Std. Error z-Statistic
α0 2.846 0.258 11.044 α1 (trend) 0.001 0.000 3.020
α2 (Summer Crisis) 0.282 0.103 2.746 α3 (Winter Crisis) 1.004 0.077 13.112
α4 (Mon) 0.164 0.012 13.538 α5 (Tue) 0.153 0.017 9.168 α6 (Wed) 0.167 0.021 7.920 α7 (Thu) 0.143 0.023 6.078 α8 (Fri) 0.122 0.026 4.773 α9 (Sat) 0.026 0.026 1.011
α10 (Winter) -0.139 0.136 -1.024 α11 (Spring) -0.214 0.125 -1.714
α12 (Summer) 0.078 0.186 0.417 α13 (Fall) -0.064 0.168 -0.378 φ1 (AR1) 0.952 0.042 22.673 φ2 (AR2) -0.150 0.057 -2.642 φ3 (AR3) 0.000 0.060 -0.004 φ4 (AR4) 0.056 0.047 1.188 φ5 (AR5) 0.015 0.045 0.328 φ6 (AR6) 0.017 0.039 0.452 φ7 (AR7) 0.064 0.030 2.132
β0 (constant) 0.105 0.000 464.343 ρ (ARCH 1) 0.282 0.028 9.919
γ (GARCH 1) 0.484 0.016 30.802 β1 Summer crisis 0.015 0.002 6.104 β2 Winter crisis 0.018 0.003 5.788
β3 (Mon) -0.090 0.000 -3.70E+101 β4 (Tue) -0.071 0.000 -4.70E+101 β5 (Wed) -0.066 0.000 -5.40E+101 β6 (Thu) -0.058 0.000 -3.10E+100 β7 (Fri) -0.070 0.000 -3.40E+101 β8 (Sat) -0.064 0.000 -8.70E+100
β9 (Winter) -0.039 0.000 -3.90E+101 β10 (Spring) -0.039 0.000 -5.60E+101
β11 (Summer) -0.024 0.002 -11.087 β12 (Fall) -0.036 0.001 -67.288
R-squared 0.940
28
Table 9 - Parameter estimates of the Nordpool pricing model specification. Dependent variable: day ahead daily log prices. Sample: 04/05/92-09/04/03
Parameter Coefficient Std. Error z-Statistic α0 4.267 0.345 12.385
α1 (trend) 0.001 0.000 5.441 α2 (Crisis) 0.492 0.030 16.356
α3 (Futures) -0.315 0.275 -1.148 α4 (Sweden) 0.212 0.090 2.361 α5 (Finland) -0.546 0.098 -5.571
α6 (WestDen) -0.757 0.102 -7.385 α7 (EastDen) -0.618 0.196 -3.158
α8 (Mon) 0.131 0.011 12.302 α9 (Tue) 0.127 0.011 11.486
α10 (Wed) 0.128 0.013 9.613 α11 (Thu) 0.115 0.016 7.384 α12 (Fri) 0.091 0.018 5.228 α13 (Sat) 0.038 0.019 2.031
α14 (Winter) 0.029 0.042 0.705 α15 (Spring) -0.187 0.038 -4.878
α16 (Summer) -0.344 0.044 -7.774 α17 (Fall) -0.106 0.044 -2.415 φ1 AR(1) 0.514 0.139 3.696 φ2 AR(2) 0.378 0.131 2.881 θ1 MA(1) 0.319 0.134 2.371 θ2 MA(2) 0.131 0.034 3.815 θ3 MA(3) 0.141 0.031 4.609 θ4 MA(4) 0.145 0.023 6.195 θ5 MA(5) 0.148 0.024 6.256 θ6 MA(6) 0.203 0.024 8.625 θ7 MA(7) 0.208 0.027 7.844
β0 0.183 0.000 1.3E+102 ρ1 (ARCH 1) 0.159 0.019 8.403 ρ2 (ARCH 2) 0.062 0.018 3.407 ρ3 (ARCH 3) 0.054 0.015 3.564 ρ4 (ARCH 4) 0.027 0.010 2.688 ρ5 (ARCH 5) 0.023 0.009 2.617 ρ6 (ARCH 6) -0.009 0.006 -1.455 ρ7 (ARCH 7) 0.055 0.017 3.191
γ1 (GARCH 1) 0.021 0.060 0.352 β1 (trend) 0.000 0.000 -11.090 β2 (crisis) 0.004 0.001 4.334
β3 (Futures) -0.030 0.015 -2.012 β4 (Sweden) -0.047 0.014 -3.233 β5 (Finland) -0.040 0.014 -2.777
β6 (WestDen) -0.033 0.014 -2.303 β7 (EastDen) -0.026 0.014 -1.822
β8 (Mon) -0.039 0.007 -5.513 β9 (Tue) -0.048 0.005 -8.829
β10 (Wed) -0.048 0.005 -9.335 β11 (Thu) -0.048 0.005 -9.410 β12 (Fri) -0.047 0.005 -9.276 β13 (Sat) -0.045 0.005 -8.714
µ13 (Winter) -0.034 0.000 -74.013
29
µ14 (Spring) -0.034 0.000 -107.758 µ15 (Summer) -0.036 0.000 -107.263
µ16 (Fall) -0.036 0.000 -1.2E+101 R-squared 0.959
30
Figure 1: Nord Pool day-ahead daily log-prices, from November 20th 2002 to January 31st 2003 (crisis).
5,6
5,8
6
6,2
6,4
6,6
6,8
11/2
0/20
02
11/2
2/20
02
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4/20
02
11/2
6/20
02
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02
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02
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02
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02
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02
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02
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02
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02
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02
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02
12/3
0/20
02
1/01
/200
3
1/03
/200
3
1/05
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3
1/07
/200
3
1/09
/200
3
1/11
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3
1/13
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3
1/15
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3
1/17
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3
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3
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3
1/23
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3
1/25
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3
1/27
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3
1/29
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3
1/31
/200
3
NordPool daily day-ahead log-prices
31
Figure 2. Cal-PX day-ahead daily log-prices, from May 16th to September 30th 2000 (summer crisis).
3,5
4
4,5
5
5,5
6
5/16
/200
0
5/20
/200
0
5/24
/200
0
5/28
/200
0
6/01
/200
0
6/05
/200
0
6/09
/200
0
6/13
/200
0
6/17
/200
0
6/21
/200
0
6/25
/200
0
6/29
/200
0
7/03
/200
0
7/07
/200
0
7/11
/200
0
7/15
/200
0
7/19
/200
0
7/23
/200
0
7/27
/200
0
7/31
/200
0
8/04
/200
0
8/08
/200
0
8/12
/200
0
8/16
/200
0
8/20
/200
0
8/24
/200
0
8/28
/200
0
9/01
/200
0
9/05
/200
0
9/09
/200
0
9/13
/200
0
9/17
/200
0
9/21
/200
0
9/25
/200
0
9/29
/200
0
CalPX daily day-ahead log-prices
32
Fig 3 –Spot and futures electricity prices, Nord Pool
20/11/2002
01/10/2002
0
100
200
300
400
500
600
700
800
900
1000
02/0
9/20
02
09/0
9/20
02
16/0
9/20
02
23/0
9/20
02
30/0
9/20
02
07/1
0/20
02
14/1
0/20
02
21/1
0/20
02
28/1
0/20
02
04/1
1/20
02
11/1
1/20
02
18/1
1/20
02
25/1
1/20
02
02/1
2/20
02
09/1
2/20
02
16/1
2/20
02
23/1
2/20
02
30/1
2/20
02
06/0
1/20
03
13/0
1/20
03
20/0
1/20
03
27/0
1/20
03
03/0
2/20
03
10/0
2/20
03
17/0
2/20
03
24/0
2/20
03
SpotFuture 1 weekFuture 4 weeks
33
Fig. 4 –Futures volumes Nord Pool
01/10/200220/11/2002
0
200
400
600
800
1000
1200
1400
02/0
9/20
02
09/0
9/20
02
16/0
9/20
02
23/0
9/20
02
30/0
9/20
02
07/1
0/20
02
14/1
0/20
02
21/1
0/20
02
28/1
0/20
02
04/1
1/20
02
11/1
1/20
02
18/1
1/20
02
25/1
1/20
02
02/1
2/20
02
09/1
2/20
02
16/1
2/20
02
23/1
2/20
02
30/1
2/20
02
06/0
1/20
03
13/0
1/20
03
20/0
1/20
03
27/0
1/20
03
03/0
2/20
03
10/0
2/20
03
17/0
2/20
03
24/0
2/20
03
03/0
3/20
03
10/0
3/20
03
17/0
3/20
03
Volumes fut. 1 w
Volumes fut. 4 w
34
Figure 5 . Autocorrelograms of day-ahead electricity log-prices, daily arithmetic averages, NordPool, whole sample. Lags are expressed in days
Figure 6. Autocorrelograms of day-ahead electricity log-prices, daily arithmetic averages CalPX, whole sample. Lags are expressed in days.
35
Figure 7. Autocorrelograms of day-ahead electricity log-prices, daily arithmetic averages, NordPool. Focus on the first 40 lags
0 5 10 15 20 25 30 35 40 45-0.2
0
0.2
0.4
0.6
0.8
1
1.2Sample autocorrelation coefficients
Lag
Correlation
Figure 8. Autocorrelograms of day-ahead electricity log-prices, daily arithmetic averages, Cal-PX, whole sample. Focus on the first 40 lags.
5 10 15 20 25 30 35 40-0.2
0
0.2
0.4
0.6
0.8
Sample autocorrelation coefficients
Lag
Correlation
36
Figura 9. Autocorrelogram of NordPool squared log-returns, up to 3 years daily lags.
37
Figura 10. Autocorrelogram of Cal-PX squared log-returns, up to 903 daily lags.
38
