The Role of Residual Demand in Electricity Price Analysis and Forecasting: Case of Czech Electricity Market

Abstract

Most of scientific papers dealing with power price predictions base their work on various statistical time series models. In this paper we propose a new, purely fundamental, approach to the issues of electricity price analysis and forecasting. While precise replication of real power market processes is very complicated, we show that even relatively simple fundamental model is able to explain large part of price movements on the electricity markets. Analysis presented is based predominantly on the Merit order theory and introduces the concept of residual demand as a crucial variable for explaining hourly electricity price movements. While the analysis shown in this paper is applied to the Czech electricity day-ahead market, it can be well replicated also for the other relevant European power market areas. Tests of fundamental approaches towards power price forecasting have shown very promising results and we believe they deserve more attention from the electricity market researchers.Keywords: Electricity market, Electricity prices forecasting, Merit order theoryJEL Classifications: Q41, Q47