A comparison of restructured electricity pools, the key characteristics of NZEM spot prices, and the estimation of a two-factor mean reverting model

Abstract

Electricity markets around the world have undergone widespread deregulation and restructuring in the pursuit of more competitive and efficient pricing. An important result of this trend is the impact on the dynamics of wholesale electricity prices. In turn this has lead lo increased demand for risk management systems and tools capable of modelling and forecasting electricity spot prices. This thesis compares key aspects of restructured electricity pools and examines the characteristics of spot prices from the New Zealand Electricity Market over the period October 1996 to June 2000. Kalman filtering techniques together with maximum likelihood estimation are then used to investigate the suitability of a two-factor mean reverting model for wholesale spot prices.