The Impact of Regulatory Reforms on Demand Weighted Average Prices

Sherzod N Tashpulatov

doi:10.3390/math9101112

Abstract

Average prices are popularly used in the literature on price modeling. Calculating daily or weekly prices as an average over hourly or half-hourly trading periods assumes the same weight ignoring demand or traded volumes during those periods. Analyzing demand weighted average prices is important if producers may affect prices by decreasing them during low-demand periods and increasing them during high-demand periods within a day. The prediction of this price manipulation might have motivated the regulatory authority to introduce price caps not only on annual average prices but also on annual demand weighted average prices in the England and Wales wholesale electricity market. The dynamics of demand weighted average prices of electricity has been analyzed little in the literature. We show that skew generalized error distribution (SGED) is the appropriate assumption for model residuals. The estimated volatility model is used for evaluating the impact of regulatory reforms on demand weighted average prices during the complete history of the England and Wales wholesale electricity market.

Highlights

Defining daily or weekly prices as an arithmetic average of hourly or half-hourly prices assumes the same weight for each period
In this research, we consider demand weighted average electricity prices during the complete history of the England and Wales wholesale market, which have not been analyzed before. This is especially interesting given that the regulatory authority in Great Britain introduced price caps on annual average and annual demand weighted average prices of electricity
Using the Q-test proposed in [39] and BDS-test further developed in [40], we find that the standardized residuals and standardized residuals squared of the estimated volatility model are not serially correlated and are i.i.d

Summary

Introduction

Defining daily or weekly prices as an arithmetic average of hourly or half-hourly prices assumes the same weight for each period. In this research, we consider demand weighted average electricity prices during the complete history of the England and Wales wholesale market, which have not been analyzed before. This is especially interesting given that the regulatory authority in Great Britain introduced price caps on annual average and annual demand weighted average prices of electricity. The motivation of introducing two different price caps could have been related to the prediction by the regulatory authority that producers may increase prices when demand is high and reduce prices when demand is low.

Methods

Discussion

Conclusion