Applicability of One-factor Mean-reversion Equation to Electricity Price in Deregulated Markets

Abstract

One-factor mean-reversion equation (OFMRE) having three parameters of reversion speed, mean-reversion level, and volatility is a mathematical model to simulate a characteristic of electricity price which tends to revert to the mean-reversion level with a random walk. An applicability of OFMRE to 1 year, 3 months, and 2 months-periods of electricity price at three foreign deregulated day-ahead spot markets (Nord Pool, National Electricity Market of Australia, and PJM day-ahead market) at year 2000-2001 was studied. 1 year-period of electricity price at all the markets could not be applied to OFMRE, but several 3 months-period or 2 months-period of the electricity price at Nord Pool and PJM day-ahead market could be applied, which was related with price spike appearances and/or normal distribution of the electricity price.