Electricity Prices as a Stochastic Process

Electricity prices vary with time. Stochastic processes are functions of time whose values at different times are random variables. Continuous time stochastic models of commodity prices led to the success of geometric Brownian motion (GBM) in modeling stock prices. This chapter describes some significant features of electricity prices, such as mean reversion, seasonality, volatility and spikes. Based on the characteristics of electricity prices, the chapter discusses continuous time stochastic models and a variety of time series models for electricity prices. It addresses the challenge of capturing the behavior of electricity prices. A drawback of GBM with constant drift and variance is that the model does not represent the seasonal behavior of some commodities. The chapter compares additive mean reversion process and Brownian motion with drift. According to the properties of GBM and the mean reversion process, for a fixed time, the distribution of price is a lognormal distribution.