Universidad Carlos III de Madrid

Diff erent Models to predict Electricity prices

Vicente David Capriles Barraza

Introduction

This paper is about the change in the price of electricity and compares
models in forecasti ng. I took from FRED data of the United States price of
electricity, Gas, Coal, and Temperature. The data start in 1991 February and
ends in November 2021.

The idea is to fi nd which methodology adapts bett er for the data generati ng
process. For that, I will break the sample into two parts, 250 observati ons
(2/3 of the total) to esti mate the models and 120 observati ons (1/3 of the
total) to do forecasti ng and write some conclusions based on the test of
Diebold and Mariano and complete the analysis with the impulse response
model.
 Variables

Melec: Price of 1 Megawatt of electricity

GAS: Price of 1 gallon of gas.

Coal: Price of 1 ton of coal.

Temperature: the average temperature of the citi es of the United States.

D: Indicate the First diff erence of the variable.

Note: To simplify, the analysis of all variables has been seasonally adjusted.

This analysis examines whether the variables are I(0) or I(1). To do that, it is
necessary to look at the graph to have a fi rst impression.
Graph and Unit Root Test

Graph, Melec, Gas, and coal are

Trending, these variables could be

I (1) process
Graph and Unit Root Test

H0: Has a Unit Root, H1: False H0.

Unit Root test Formal Procedure.
Test unit root in Melec,
Trend, and intercept, intercept
.
Graph and Unit Root Test
None; Not reject Ho, so there is a unit root. There is no I(0).

There is not enough evidence to reject the null hypothesis; I am in

favor of believing this is an I(1) process
 ARDL Model

Linear and non-linear part Wald Test

ARDL Heteroskedasticity Test

Heteroskedasticity
ARCH type
EGARCH Model

Residuals and Residuals square

Compared with TAR or STAR Model

Unit Root test with Break

 STAR Model

This model is performing well. The lags are significant,

and the interactive effect is too; the slope is not
significant and the threshold either.
It is worth looking at the Escribano and Jorda test to see
if the model should be estimated with a logistical or
exponential function.
The Escribano and Jorda test

The Escribano – Jorda test shows that both

are significant, but the logistic one is more
significant; that is the one I am selecting.
 GRAPH of the STAR MODEL

Prices are too volatile, and even more in

monthly data; it makes sense to think
that the TAR Model will be a better
approximation than the Smooth
transition model.
Even though this model will be valid if
the residuals are white noise and there
is no heteroskedasticity.
Checking the validity of the White Serial Correlation
Heteroskedasticity
model
Residuals
Residuals^2

The residuals, the residuals^2 are white noise, there is no autocorrelation

and there is no heteroscedasticity, meaning this is a valid model.
Compared to TAR Model
This model has three regimes the first one with 42
observations, the second one with 50 observations, and the last
one with 27 observations.
The multiple breaks are not something desirable in the analysis,
but this is the best model; the R^2 = 0.495, and the adjusted
R^2 is 0.3859, which is higher in comparison with the STAR
Model and the Akaike criteria are lower (-11.29) vs. (-11,12) in
the STAR Model, meaning this model is better.
Test for the Break
To understand if the thresholds are
significant is worth comparing the values
with the Bai – Peron critical value, 162 >
23.7; 25,77 > 25.75; 153.41 > 26.81, meaning
there are three breaks to consider in this
analysis.
These breaks most likely will be correlated
with the California Blackouts during the 90
´and early 2000.´
In the 90´the market got deregulated, which
caused an impact on the prices going up and
a big crisis for most electric utility companies
facing serious trouble in their finances at the
time.
 
This is a valid model if the Residuals are white noise and the
square residuals and there is no correlation or heteroscedasticity.
 Checking the validity of the model
Residuals White
Residuals^2 Heteroskedasticity Serial Correlation

The residuals, the residuals^2 are white noise, there is no autocorrelation

and there is no heteroscedasticity, meaning this is a valid model.
TAR Vs. STAR Model

Conclusion This final section of the TAR vs. STAR model is to choose a
winner to compete against the ARDL EARCH Model.
The winner model is TAR allowing for multiples breaks for good
economic reasons. The California blackouts allow for those
breaks, the R^2 is higher, and the Akaike criteria are lower.

Next Page, Forecasting between

TAR Model and EGARCH
The best model should forecast better; for that, I will compare
Root Mean Squared Error to have an idea and then do the
Diebold Mariano test to see if there is any difference in the
forecasting.
Forecasting EGARCH

TAR
The Tar model has an RMSE of 0.01159
EGARCH ARDL Model

This model has an RMSE of 0.001518.

In the first look, it seems like the EGARH model performs better, but
there is not enough evidence for this claim to prove this is necessary
for the Diebold Mariano test.
Diebold and Mariano Test

This test is about creating a model. With the idea of

forecasting the data, doing this is possible to capture the
prediction error in the time series. This allows us to do it with
two models and compare this square error. H0: Both models
predict the same. H1: False H0.
To complete the test, I created the series TDM (Diebold
Mariano test), which is
TDM = (errorGARCH)^2 – (Error Tar)^2.
Now regress this series against a constant to see the mean,
and if this is not significant, both models have the same ability
to predict.
P-value > 0.05% both models have the same
ability to predict in mean.
VAR Analysis

VAR(2) with the Dmelec variable to complete this analysis

to see how long the effect is in the impulse response model.
VAR(2)
Impulse and Response analysis

This model used stationary series, so shocks can not be I (1) (permanent) by construction.
When Dmelec is shocked by himself, it takes around two periods to adapt.
When Dmelec is shocked by Dgas, it takes around 0.2 periods to adapt.
When Dmelec is shocked by Dcoal, it takes around 3.5 periods to adapt.
When Dgas is shocked by himself, it takes around five periods to adapt.
When Dcoal is shocked by himself, it takes around four periods to adapt.
This shows these variables are relevant and have an impact on each other.
Thank you very
much for the
classes and the
knowledge