Academic journal article International Journal of Business

On the Estimation of Extreme Values for Risk Assessment and Management: The ACER Method

Academic journal article International Journal of Business

On the Estimation of Extreme Values for Risk Assessment and Management: The ACER Method

Article excerpt


During the recent years we have seen a move from regulated to deregulated electricity markets. Following the deregulation of the British electricity market in the early 1990s, the Norwegian government ruled for a deregulation of the national electricity market in 1991. In 1993 Statnett Marked AS was established, and in 1996 the Nord Pool market was created as a common electricity market for both Norway and Sweden, making it the first market for trading power in the world1. Finland joined the Nord Pool market area in 1998, and western and eastern part of Denmark joined in 1999 and 2000 respectively. In 2002 the electricity and energy derivatives markets were separated into Nord Pool Spot and Nord Pool ASA (now NASDAQ OMX Commodities Europe). Today Nord Pool Spot runs the spot (day-ahead) market as well as the intraday market (Elbas) in the Nordic region and Estonia, and it is the largest market of its kind.

The spot market is an auction based day-ahead market where the participants place bids on hourly production and consumption, at a given price and volume, with deadline 12.00CET scheduled for delivery the next day. The system price is then calculated as the price where the supply curve meets the demand curve, without any regard for possible bottlenecks in the transmission grid. To deal with congestion in the transmission grid, the local transmission system operators (TSO) can divide their area into different bidding areas. A congested line from bidding area one to bidding area two can then be dealt with by raising the price in the second bidding area. This is done in order to lower demand and increase the production incentive in the relevant bidding area. Today Norway is divided into 5, Sweden into 4 and Denmark into 2 bidding areas. Finland and Estonia are not divided into any bidding areas.

The intraday market functions as a supplement to the spot market to secure balance in the supply and demand for the electricity market, with trading available up to one hour before delivery. With the increasing fraction of unpredictable wind power in the Nordic region (and Germany, also covered by Elbas), leading to more unpredictable supply, the importance of the intraday market is increasing.

In the Nordic market region, during a year with average precipitation, almost half of the electricity is produced by hydropower. In Norway hydropower counts for almost 98% of the total electricity production, while in Sweden and Finland the production is a mixture of hydro, nuclear and thermal power. In Denmark thermal power (mainly coal fueled) is the largest source of electricity generation with an increasing installed capacity of wind power.

Due to the difficulties and costs of storing electricity (electricity in itself is in practice un-storable, but resources for electricity generation, e.g., water in a reservoir, can be stored) and the observed price inelasticity of consumers (Fezzi and Bunn, 2010), the observed spot prices are highly volatile. Compared to other energy commodities the price changes of the electricity spot prices are often very large, and often originate from events such as unexpected power plant outages, transmission grid congestion and unexpected increases in demand (Geman and Roncoroni, 2006). Some stylized fact of the price changes in these spot data is that they display very heavy tails, significant serial correlation, seasonality and volatility clustering (Weron, 2006). Seasonality concerning the electricity sport price is for the Nordic market easiest to observe on a yearly basis. Cold winters generally give a significant increase in prices due to heavily increased demand. With the Nordic market being highly dependent on hydro power, the observed prices are generally higher during dry years.

Extreme price changes or spikes are observed in electricity markets around the world (Escribano et al., 2002), and has been studied extensively over the last years. …

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