Regression-based estimation of the electricity market price demand-dependent volatility

The process of price formation in an electricity market is an extremely complex one in practice due to different endogenous factors, namely generator gaming, unexpected out-ages and transmission congestion, among others. As a result, the market clearing prices are of stochastic nature, bringing about uncertainty and risk to all participants. In this work, the role of the demand as determining factor in the price formation process in a centralized electricity market is examined. An econometric-based analysis model shows not only how the electricity markets may become substantially volatile as the demand increases, but it also lends itself to the quantification of the benefits of marginal consumption reductions in lower price volatility, lower risks and therefore, lower hedging costs for all agents.