| Since 1990 many countries have started a deregulation process in the electricity wholesale market with a view to gaining in efficiency, lowering prices and encouraging investments. In most of the markets these objectives have been attained, but at the same time prices have shown high volatility. This is mainly due to certain unique characteristics of electricity: it cannot be easily stored; and the flow across lines is dependent on the laws of physics.; Electricity price variance has been studied very little. Variance is important for constructing prediction intervals for the price. And it is a key factor in pricing derivatives, which are used for energy risk management purposes.; A fundamental bid-based stochastic model is presented to predict electricity hourly prices and average price in a given period. The model captures both the economic and physical aspects of the pricing process, considering two sources of uncertainty: availability of the units and demand. This work is based on three oligopoly models---Bertrand, Cournot and Supply Function Equilibrium (SFE) due to Rudkevich, Duckworth, and Rosen---and obtains closed form expressions for expected value and variance of electricity hourly prices and average price.; Sensitivity analysis is performed on the number of firms, anticipated peak demand and price elasticity of demand. The results show that as the number of firms in the market decreases, the expected values of prices increase by a significant amount. Variances for the Cournot model also increase. But the variances for the SFE model decrease, taking even smaller values than Bertrand's. Thus if the Rudkevich model is an accurate representation of the electricity market, the results show that an introduction of competition may decrease the expected value of prices but the variances may actually increase.; Price elasticity of demand severely affects expected values and variances in the Cournot model. So does the firms' anticipated peak demand in the SFE model. Market design and market rules should take these two parameters into account.; Finally, using a refinement of the model it has been demonstrated that an accurate temperature forecast can reduce significantly the prediction error of the electricity prices.; Keywords. Electricity Prices, Deregulated Electricity Markets, Electricity Price Variance, Cournot Model, Bertrand Model, Supply Function Equilibrium, Rudkevich and Duckworth and Rosen's Formula, Stochastic Load, Hourly Prices, Average Prices, Edgeworth Expansion, Method of Cumulants, Volatility, Energy Risk Management, Electricity Derivatives Prices, Value-at-Risk, Conditional Value-at-Risk. |
