Price Formation in Electricity Markets

Two characteristics are a paramount to understand price behaviour in competitive electricity markets: mean reversion and volatility. We have focused our analysis to determine how these characteristics operated in the case of the Spanish wholesale electricity market. We could observe that CCGT play a key role in setting marginal prices as both gas prices and generation present significant price elasticities. In addition, we found that hydropower generation is an important technology to moderate the prices as it is possibly being use as a baseload technology. When analysing volatility aspects, we found that electricity prices exhibit a remarkable structure of time-variant conditional volatility and presented strong weekly seasonality.