Modeling Alberta power prices through fundamentals

Abstract

We model medium- and long-term Alberta power prices by identifying the primary price drivers and characterizing their dynamics in an engineering-based bottom-up model. This fundamental model is based on the economic theory of supply and demand. Power prices will be represented naturally while satisfying operational constraints. In view of the uncertainty around their future values, we model independent exogenous variables such as fuel prices, outages and load as stochastic processes. The model simulates bid stack by incorporating historical bidding behavior. This simulated bid stack model is an original, creative approach to modeling not just spot prices but also different risk measures and forward contracts. The interactions of simulations of different factors produce a distribution of prices, with a probability associated with each price range, rather than having a single price. While common optimization models in the literature mimic the role of a market administrator, our simulation-based model aims to combine the influences of a wide range of underlying variables in a mathematical approach. Fundamental models can potentially be used for delta analysis, scenario/sensitivity analysis, measuring risk matrixes, market-price-of-risk analyses, development of trading strategies and decision support for investments or acquisitions.