Nonparametric approaches to estimation problems for demand and supply functions in Power Exchange markets

Abstract

In this paper, we demonstrate two approaches to estimate supply and demand functions in the Japan Electric Power Exchange (JEPX) spot market based on the sell and buy matching rates (SMRs and BMRs) and the nonparametric simultaneous equations. In the first approach, we apply the generalized additive model (GAM) of the contract price on the SMR and the BMR to derive the volume rate functions, where the SMR and the BMR are defined using the contract volume divided by the total selling and buying volumes. We demonstrate that supply and demand functions are obtained by performing the coordinate transformations for the volume rate functions. In the nonparametric simultaneous equations approach, we use the total selling and buying volumes as exogenous variables and show that supply and demand functions may be constructed based on parametric representations using GAMs. An empirical analysis is also included to compare the two approaches.