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Modelling of Fuel- and Energy-Switching Prices by Mean-Reverting Processes and Their Applications to Alberta Energy Markets

Author

Listed:
  • Weiliang Lu

    (Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada)

  • Alexis Arrigoni

    (Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada)

  • Anatoliy Swishchuk

    (Department of Mathematics and Statistics, University of Calgary, Calgary, AB T2N 1N4, Canada)

  • Stéphane Goutte

    (CEMOTEV, University Paris-Saclay, Bâtiment Bréguet, 3 Rue Joliot Curie 2e ét, 91190 Gif-sur-Yvette, France)

Abstract
This paper introduces a fuel-switching price to the Alberta market, which is designed for encouraging power plant companies to switch from coal to natural gas when they produce electricity; this has been successfully applied to the European market. Moreover, we consider an energy-switching price which considers power switch from natural gas to wind. We modeled these two prices using five mean reverting processes including a Regime-switching processes, Lévy-driven Ornstein–Uhlenbeck process and Inhomogeneous Geometric Brownian Motion, and estimate them based on multiple procedures such as Maximum likelihood estimation and Expectation-Maximization algorithm. Finally, this paper proves previous results applied to the Albertan Market where the jump modeling technique is needed when modeling fuel-switching data. In addition, it not only gives promising conclusions on the necessity of introducing Regime-switching models to the fuel-switching data, but also shows that the Regime-switching model is better fitted to the data.

Suggested Citation

  • Weiliang Lu & Alexis Arrigoni & Anatoliy Swishchuk & Stéphane Goutte, 2021. "Modelling of Fuel- and Energy-Switching Prices by Mean-Reverting Processes and Their Applications to Alberta Energy Markets," Mathematics, MDPI, vol. 9(7), pages 1-24, March.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:7:p:709-:d:523832
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    References listed on IDEAS

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    Cited by:

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