Replicating Electricity Spot Prices Through Inverse Optimization Of Supply Shocks

Abstract

Developing a model that accurately replicates the stochastic process exhibited by electricity prices has been a significant challenge for practitioners and researchers alike. The exceptional volatility of electricity prices makes the buying and selling of electricity a mathematically complex issue. We present a structural model that provides useful insights into the impact of changes in electrical demand and supply on the price of electricity. The model will make use of stochastic supply perturbations to reflect the unexpected changes in generation capacity which have been observed to be linked to large price movements. In doing so, we hope to achieve a better understanding of how and to what extent supply shocks impact and replicate price movements.