Evaluation of Price Linkage Risk between Power and Natural Gas Markets Based on Volatility Spillover Effects

With the deepening of the worldwide energy transformation, gas-fired power generation plays a more important role in the power system. The behavior of market entities will strengthen the connection between power and gas markets, and affect the transmission of price information. In this paper, a method to evaluate the risk of linkage relationship between power price and gas price based on volatility spillover is proposed, which can provide the information about price volatility between power market and natural gas market for market entities. Firstly, the bivariate Generalized Autoregressive Conditional Heteroskedasticity model to evaluate the degree of volatility between the rate of change of power price and gas price is constructed. Then, the risk early warning levels of power price and gas price transmission based on value-at-risk are proposed. Finally, the case studies on the power and gas market in the United States are performed to verify the effectiveness of the proposed method. The results show that there is some short-term asymmetric price volatility transmission in both directions between the power market and natural gas market, and the price linkage risk can be evaluated by the model, which can provide references of early warning for market entities.