Journal of Energy Markets

This issue of The Journal of Energy Markets contains three important research contributions on the themes of electricity wholesale demand and price forecasting, electricity futures, and electricity retail market innovations. Electricity markets are undergoing major changes and continue to require insight from novel research publications such as this one.

In the issue’s first paper, “Estimating marginal effects of key factors that influence wholesale electricity demand and price distributions in Texas via quantile variable selection methods”, Tahir Ekin, Paul Damien and Jay Zarnikau observe a subtle point: understanding the key drivers of prices and energy consumption is complicated because the distributions of prices and consumption are asymmetric and fat-tailed. In other words, the sets of relevant covariates can vary depending on the segment of interest in the conditional distributions of price and demand. Using a large data set from the Electric Reliability Council of Texas, this study uses quantile regressions and attendant variable selection methods to choose the most important factors that influence demand and price distributions. Among its many findings, two critical ones are that the marginal effects of the covariates change throughout the distributions of demand and price, and that the number of relevant variables selected using mean regressions generally exceeds the number selected using quantile regressions. Practical consequences for maintaining a reliable electricity market are also discussed.

“Introducing stylized facts on electricity futures through a market impact model” by Jakob Krause – our second paper – provides an alternative way of introducing the stylized facts on electricity futures into high-frequency modeling. Krause’s analysis develops a formulation based on the trading behavior of market participants and their corresponding market impact by exploiting characteristic initial positions and quantity risk considerations. For long times to maturity the market is influenced by hedging pressure, whereas for short times to maturity quantity risk comes into play and yields increased volatility. In addition, prices can also be negative. The model is accompanied by an empirical analysis showing that parameters that are typically only relevant on small timescales have a significant dynamic effect in daily returns over a period of years. This allows analysts to access the toolbox usually reserved for high-frequency modeling.

In the final paper in the issue, “The impact of end-user market integration and the smart grid on electricity retailers in the Nordic region”, we move from wholesale markets to retail ones. Authors Iliana Ilieva and Steven A. Gabriel observe that the energy authorities within the Nordic countries have been working intensively to create a fully operational common electricity retail market, and all customers were due to have smart meters installed by the end of 2019. These changes are of particular concern for the suppliers of retail electric power, as competition will increase and the retail products and offers related to the smart grid and specific customers’ needs will gain importance. With the help of a mixed complementarity problem formulation that describes a simplified market setting with two competing retailers, the authors analyze the impact of such market changes on electricity retailers’ price markup and profit.

Overall, this is a fascinating trio of research contributions that demonstrate the value of advanced modeling in understanding the evolving issues in electricity markets.

Derek W. Bunn
London Business School

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