A multi-factor approach to modelling the impact of wind energy on electricity spot prices

Abstract

We introduce a four-factor arithmetic model for electricity baseload spot prices in Germany and Austria. The model consists of a deterministic seasonality and trend function, both short- and long-term stochastic components, and exogenous factors such as the daily wind energy production forecasts, the residual demand and the wind penetration index. We describe the short-term stochastic factor by a Lévy semi-stationary (LSS) process, and the long-term component is modelled as a Lévy process with increments belonging to the class of generalised hyperbolic distributions. We derive the corresponding futures prices and develop an inference methodology for our multi-factor model. The methodology allows to infer the various factors in a step-wise procedure taking empirical spot prices, futures prices and wind energy production and total load data into account. Our empirical work shows that taking into account the impact of the wind energy generation on the prices improves the goodness of fit. Moreover, we demonstrate that the class of LSS processes can be used for modelling the exogenous variables including wind energy production, residual demand and the wind penetration index.