Modeling Electricity Price Dynamics Using Flexible Distributions

Abstract

We consider the wholesale electricity market prices in England and Wales during its complete history, where price-cap regulation and divestment series were introduced at different points in time. We compare the impact of these regulatory reforms on the dynamics of electricity prices. For this purpose, we apply flexible distributions that account for asymmetry, heavy tails, and excess kurtosis usually observed in data or model residuals. The application of skew generalized error distribution is appropriate for our case study. We find that after the second series of divestments, price level and volatility are lower than during price-cap regulation and after the first series of divestments. This finding implies that a sufficient horizontal restructuring through divestment series may be superior to price-cap regulation. The conclusion could be interesting to other countries because the England and Wales electricity market served as the benchmark model for liberalizing energy markets worldwide.