It is well known that day-ahead prices in power markets exhibit spikes and time-varying volatility. Spikes and extremely high volatility are the results of (short-term) frictions in demand and/or supply conditions. It is known that information on load or the reserve margin help to forecast spikes. However, these variables are not (timely) available for every market participant and this paper suggests to use temperature as a proxy. Interpreting the results from several switching-regimes models, the paper shows that the probability of spike occurrence increases when temperature deviates substantially from mean temperature levels.

Day-ahead prices, Regime-switching models, Spikes, Temperature, Transition probability
dx.doi.org/10.1016/j.eneco.2008.05.007, hdl.handle.net/1765/65355
Energy Economics
Erasmus Research Institute of Management

Huisman, R. (2008). The influence of temperature on spike probability in day-ahead power prices. Energy Economics, 30(5), 2697–2704. doi:10.1016/j.eneco.2008.05.007