Seasonal aspects of australian electricity market

Abstract

Australian electricity spot prices differ considerably from equity spot prices in that they contain an extremely rapid mean-reversion process. The electricity spot price could increase to a market cap price of AU$12,500 per megawatt hour (MWh) and revert back to a mean level (AUD$30) within a half-hour interval. This has implications for derivative pricing and risk management. For example, while the Black and Scholes option pricing model works reasonably well for equity market-based securities, it performs poorly for commodities like electricity. Understanding the dynamics of electricity spot prices and demand is also.