Analysing Negative Skewness of Spot Returns in the Australian Electricity Market

As the electricity industry reform progresses into maturity, spot price modeling and forecasting become important topics in today´s deregulated electricity market research. Electricity is different from other commodities due to its non-storable feature. Hence its spot price and return present unique characteristics, which spot price models should endeavor to capture. In essence, the purpose of this paper is to analyse the negative skewness present in daily average spot returns and test the validity of the hypothesis that there exists a direct relationship between price spikes and negative skewness. Monte Carlo technique has been employed to simulate the spot price return. Using the historical data from the Victorian market, the simulation results confirm the validity of the hypothesis on correlation between the price spikes and negative skewness. Thus, it is proposed that negative skewness should be employed as part of the criteria in evaluating daily average spot price models