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Descriptive Models for Reserve and Regulation Prices in Competitive Electricity Markets

In addition to electric energy, ancillary services, such as operating reserves and frequency regulation service, are also traded in a competitive electricity market. With the emerging smart grid technologies and large scale integration of variables resources into the grid, the market for ancillary services is expected to grow, and thus, their prices become increasingly important. The prices of ancillary services feature different patterns and characteristics when compared to electric energy prices. The differences include lower price level, higher variability, and more frequent and extreme spikes. While electric energy prices have been broadly studied in the literature, research on features and modelling of ancillary services prices is limited. This paper investigates the application of established stochastic approaches for modelling the behavior of operating reserve and regulation prices in North American electricity markets. Such descriptive stochastic models are necessary for risk management and derivative pricing of these commodities. Mean-reverting jump-diffusion (MRJD) and Markov regime-switching (MRS) models with various specifications are analyzed. Historical prices from the Ontario and New York markets have been used for model calibration and simulation analysis. The performance of the two classes of models has been compared using various statistical measures.