Roy Endré Dahl
Volatility in Electricity Prices – a studyofrecentshifts
Roy Endré Dahl, University of Stavanger,
4036 Stavanger, Norway
e-mail:
Overview
Electricity is an important carrier of energy to end users, and is produced using a variety of energy sources as input. Consequently, a change in prices for energy sources will affect the price of electricity. Recent events in the energy market has resulted in another shift in energy prices. As the world’s leading fuel, with 32.9% of global energy consumption, changes in the supply or demand side of oil can provoke large movements in the price of energy sources in general. Itinfluences natural gas and coal directly as an energy input, and affects the price of other important energy sources. Moreover, the price of oil can influence expectations and change industry incentives, as seen in the increasing investment in renewables and non-conventionalsduring the last decade and the development of the shale gas and oil industry in USA.
This paper studies the volatility seen over 12 years and considers a set of energy sources, and try to explain shifts in the volatility of electricity prices in USA from the shifts seen in other energy sources. In particular, we study recent events, originating from the increasing oil supply in the USA and the ongoing change in market expectations and market equilibrium. Consequently, oil price volatility has increased and due to its importance in the energy market, we expect to see the same for other energy commodities.
Methods
We use the Iterated Cumulative Sum of Squares (ICSS) introduced by Inclan and Tiao (1994) and further developed by Aggarwal et al (1999) and Sanso et al. (2004). It isa method to detect multiple volatility regime shifts for a financial time series. This will help us identify a set of regimes for the commodities considered and allow us to test (1) if there is a relationship between oil price volatility and the volatility of other energy commodities, and (2) if there has been a change in volatility during the last year.
Our data set consist of daily electricity prices from 6 major electricity hubs in USA[1] together with 5 energy commodities over 12 years, providing us with 3300 observations per product. Volatility is calculated with standard deviation of daily log-returns using a rolling window of 1000 observations.
Results
For the entire data sample we find that volatility is varying for all commodities. All commodities experience periods with relatively high volatility, although most only for a short period, as seen when considering shifts identified using the ICSS-method. Moreover, when we consider the latest period and drop in oil price and energy prices, we identify shifts for several commodities. However, we cannot conclude that the latest regime shifts for energy commodities in general is caused by the changes in oil price volatility.
Conclusions
In general, during our data sample period, volatility levels have varied for the energy commodities considered. Lately, volatility has increased due to the shift in oil prices and increased uncertainty about market equilibrium. We try to estimate and compare the magnitude of volatility change, using the ICSS-method, and find that although volatility has increased, and we find evidence of new regimes, it is not possible to conclude that the price of oil is the main reason for this.
References
Aggarwal, R., Inclan, C., & Leal, R. (1999). Volatility in emergingstockmarkets.Journal of Financial and Quantitative Analysis,34(01), 33-55.
BP Statistical Review of World Energy June 2014 (2014)
Dahl, R. E. and Oglend, A. (2014) Fish Price Volatility. Marine Resource Economics, Vol. 29.(4), 305-322.
Hamilton, J. (2009b), Causes and consequences of the oil shock of 2007-08. Brookings Papers on Economic Activity vol. 2009, pp. 215-261.
Inclan, C. and Tiao, G. C. (1994), Use of Cumulative Sums of Squares for Retrospective Detection of Changes of Variance. Journal of the American Statistical Association vol. 89, pp. 913-923
Kilian, L. (2009), Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review vol. 99:3, pp. 1053-1069.
Kilian, L. and Murphy, D. (2013), The Role of Inventories and Speculative Trading in the Global Market for Crude Oil. Forthcoming Journal of Applied Econometrics
Pindyck, R. S. (1994), Inventories and the short-run dynamics of commodity prices. RAND Journal of Economics, vol. 25(1), pp. 141-159.
Pindyck, R. S. (2001), The Dynamics of Commodity Spot and Futures Markets: A Primer. Energy Journal, 2001, vol. 22, pp. 1-29.
Sansó, A., Aragó, V., & Carrion, J. L. (2004). Testingforchanges in theunconditionalvarianceoffinancial time series.Revista de Economíafinanciera,4, 32-53.
[1] Columbia, New England, Indiana, Southern California, Southwest (Palo Verde) and Mid-Atlanticfrom ICE Daily Indices.