Estimating the volatility of electricity prices: The case of the England and Wales wholesale electricity market

Abstract

Abstract Price fluctuations that partially comove with demand are a specific feature inherent to liberalized electricity markets. The regulatory authority in Great Britain, however, believed that sometimes electricity prices were significantly higher than what was expected and, therefore, introduced price-cap regulation and divestment series. In this study, I analyze how the introduced institutional changes and regulatory reforms affected the dynamics of daily electricity prices in the England and Wales wholesale electricity market during 1990–2001. This research finds that the introduction of price-cap regulation did achieve the goal of lowering the price level at the cost of higher price volatility. Later, the first series of divestments is found to be successful at lowering price volatility, which however happens at the cost of a higher price level. Finally, this study also documents that the second series of divestments was more successful at lowering both the price level and volatility.