Analysis of relationships between hourly electricity

price and load in deregulated real-time power

markets
K.L. Lo and Y.K. Wu

Abstract: Risk management in the electric power industry involves measuring the risk for all
instruments owned by a company. The value of many of these instruments depends directly on
electricity prices. In theory, the wholesale price in a real-time market should reflect the short-run
marginal cost. However, most markets are not perfectly competitive, therefore by understanding
the degree of correlation between price and physical drivers, electric traders and consumers can
manage their risk more effectively and efficiently. Market data from two power-pool architectures,
both pre-2003 ISO-NE and Australia’s NEM, have been studied. The dynamic character of
electricity price is mean-reverting, and consists of intra-day and weekly variations, seasonal
fluctuations, and instant jumps. Parts of them are affected by load demands. Hourly signals on
both price and load are divided into deterministic and random components with a discrete fourier
transform algorithm. Next, the real-time price–load relationship for periodic and random signals is
examined. In addition, time-varying volatility models are constructed on random price and random
load with the GARCH (1,1) model, and the correlation between them analysed. Volatility plays a
critical role on evaluating option pricing and risk management.

1 Introduction model of the power system and a procedure for pricing.

Ideally a competitive market should give the correct short-
term and long-term price signals to buyers and sellers. In the
short term, prices should reflect the short-run marginal cost
of production. In other words, energy buyers should not
have to pay more than what it costs to produce and deliver.
It should also give incentives for investment in generation
and transmission capacity in the long term. The ideal result
is price stability. However, in the single-settlement real-time
power market, electricity prices exhibit high volatility and
include a number of price spikes. The price spikes in the US
Midwest in June 1998 were a striking example. Electricity
prices rose to $7,500 per megawatt hour compared with
typical prices of around $30 per megawatt hour. Nowadays,
it is not surprising that power prices are the most volatile of
all traded commodities.
Electricity prices exhibit short-term high volatility due to
physical market characteristics. Therefore an important
aspect of assessing the markets is to understand the
behaviour of electricity prices, and the relationship between
physical market characteristics and electricity price. The
main objective for exploring the relationship between price
and physical factors is to accurately predict price and its
volatility. In general, there are two types of electricity price
forecasting methods: one is the mathematical modelling
method such as time-series analysis and ANN; the other is
the physical simulation module, which includes a detailed
r IEE, 2004
IEE Proceedings online no. 20040613
doi:10.1049/ip-gtd:20040613
Paper first received 31st March 2003 and in revised form 28th January 2004
The authors are with the Power Systems Research Group, Department of
Electronic and Electrical Engineering, University of Strathclyde, Glasgow G1
1XW, UK
Although the simulation method can provide detailed
insights into the price curve, it requires many system
parameters and a lot of market information. For example,
the ISO-NE system consists of 324 generating units in 180
market nodes. There are about 2500 constraints and 3800
variables [1]. Therefore it is difficult to implement price
forecasting using the physical module in a large power
system because of the number of system uncertainties. As
for the mathematical modelling method, an important
procedure is to find the inclusion of important exogenous
variables that would impact the price forecasting results.
Some important physical variables [2–4] can be summed as:

Power demands

System or regional reserves

Transmission and generation outages

Bidding strategy and market power

System congestion

Ancillary services

Market rules
Among these factors, most are unpredictable except for
power demands. Moreover, power demands play the most
important role in the behaviour of periodic electricity price.
These are the reasons why this paper focuses on the price–
load relationship; the results could enhance price forecasting
by means of accurate demand forecasting. It is apparent
that other physical variables could also impact electricity
prices, especially on the random components of prices.
However, it is not easy to consider the effect of these
variables on prices because little public information is
available from the pre-2003 ISO-New England and
Australia’s National Electricity Market (NEM).

IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004 441
 On the issue of price–load relationship, [5] introduces the
relationships in California’s electricity market with regime
classification and regression analysis. Reference [6] presents
a fuzzy-set based model to illustrate the price–load relation.
However, these proposed methods consider the relationship
as a pure regression problem. In fact, some price signals
could not be described as price–load regression functions
because they may be affected by other physical factors.
Therefore in this paper, the price–load relation is divided
into two parts: periodic and non periodic components that
are used to evaluate reasonably the effect on real-time prices
due to load fluctuations. These periodic components are
filtered by a typical frequency-based method, the DFT
algorithm. On the other hand it is quite difficult to evaluate
any clear connection between random price and random
load. However, it could be useful to study the probability
distribution of correlation coefficients to estimate the price–
load relationship according to different periods and load
levels. In addition, the high volatility on electricity prices is a
potential problem in deregulated power markets. Volatility
is the most important variable on option pricing, portfolio
optimisation and risk management. Therefore the volatility
of random prices and loads as well as the correlation
between them has been analysed in this paper.
2 Characteristics of competitive electricity prices
Power price volatility or spikes cannot be avoided even in
perfect markets. It is important to understand the
characteristics of competitive electricity prices from histor-
ical data in different power markets. For example, price
volatility in the electricity market is rooted in hourly, daily,
weekly, and seasonal uncertainty; most of the factors
contributing to the uncertainty are reflections of regular
fluctuation of the power loads. The periodic fluctuation
could be considered as the deterministic component of
electricity prices. Furthermore, electricity prices have a
number of instant price spikes with a long-term mean-
reverting trend, which is the random component and results
from the physical characteristics of the power system, such
as unusual demand, unexpected generator outages and
transmission constraints. Factors affecting the fluctuation of
random price result from not only load conditions, but also
supply conditions.
Figure 1 shows the static relationship between supply-
load sides. The aggregate supply curve is the ranking of all
participative generation units, and the real-time price could
be determined by the intersection between supply and load
curves. If the load curve is given by D1, the price is not
sensitive to load shift. On the other hand., if the load curve
is given by D2, even small increments in load would have
huge effects on the price because the load intersects with the
steep part of the supply stack. In addition, the supply and
D2
real-time electricity price
load curve
D1
aggregate supply curve
power, MW
Fig. 1 Real-time equilibrium dynamics between supply and load
sides
442
load curves are not static in time. Therefore the relationship
between load and prices in real-time power markets has
become an important topic in power system economics.
For the analysis of deterministic components it is
essential to determine the linkage of a time-based or
frequency-based function between price and load. Any
signal can have more than one representation to identify it
depending on the ability of the chosen representation to
extract important information from the signal. A signal
may appear very complex in the time domain, but may have
a simple representation in the frequency domain, and vice
versa. For example, most financial data for stock markets
are usually processed with time-series analyses because these
signals show time trends. As for frequency-based analysis, it
provides a seasonal effect or a cyclic view on the data in the
frequency domain. Because the typical curves of electricity
prices and loads have inherent periodic components it is
useful to obtain their deterministic components under
frequency-based analysis. On the other hand, for the
random components of prices and loads, it is difficult to
decide the deterministic function between them. However,
the probability that electricity price fluctuation results from
unusual load fluctuations could be evaluated with the
statistical analysis of historical data.
In addition, price spikes could lead to high price
volatility. These price spikes do not follow a regular daily
pattern; they appear to be an intrinsic problem with a
particular competitive market [7]. If the random manner of
volatility on price and demand can be detected in advance,
the trader in the power market could predict the risk by
simulation methodology [8] on the basis of time-varying
volatility, and the effect of random load volatility on the
price volatility could also be evaluated.
3 Market designs on pre-2003 ISO-NE and
Australia’s NEM
In this work two power markets, ISO-NE and Australia’s
NEM, were chosen for analysis. The pre-2003 ISO-NE
market was an hourly real-time wholesale market, which
follows a single energy clearing price system. NEM in
Australia is a half-hourly real-time wholesale market. Its
pricing system is based on the regional reference price
(RRP) where a uniform price is computed for each region.
The main similarity between both markets is that they are
designed as single-settlement real-time markets. In compar-
ison with multisettlement systems, price fluctuations in
single-settlement systems are highly unstable because they
are affected by all system uncertainties only during actual
operation periods. Risk management needs to pay more
attention to the electricity price characteristics in these
markets. This is the reason why these two markets are
chosen for analysis.
The main differences between pre-2003 ISO-NE and
NEM were the trading intervals and pricing models. The
uniform-pricing (UP) market model with one hour trading
interval was adopted in the pre-2003 ISO-NE. The market
architecture in NEM is the regional-pricing (RP) market
model with an half-hour trading interval. The half-hour
trading interval provides more market information to
participants, which would improve the accuracy of demand
or price forecasting. This is shown, in Table 1 in Section 4,
where the number of bins in NEM is higher than that in
ISO-NE. In addition, the development of the RP-based
market is an improvement over the UP-based market
because RP markets could reflect the actual balance
condition between supply and demand in each region
to give the correct price signals. This leads to a higher
IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004
Table 1: Statistical results of same bin numbers between price and load spectrum for both power markets

Power market Duration Identical bin numbers and corresponding periods (in
parenthesis) in spectrum between prices and loads

ISO-NE 4/2B5/6 2001 weekday 1, 26(24h), 51(12 h), 126(4.8 h)

weekend 1, 11(24 h), 21(12 h), 41(6 h)
6/4B7/8 2001 weekday 1, 26(24 h), 51(12 h), 126(4.8 h)
weekend 1, 11(24 h)
8/13B9/16 2001 weekday 1, 26(24 h), 51(12 h), 101(6 h)
weekend 1, 11(24 h), 31(8 h)
10/1B11/4 2001 weekday 1, 26(24 h), 51(12 h), 101(6 h)
weekend 1, 21(12 h), 31(8 h)
11/5B12/9 2001 weekday 1, 26(24 h), 51(12 h),76(8 h),101(6 h), 126(4.8 h), 176(3.43 h)
weekend 1, 11(24 h), 31(8 h), 61(4 h)
NEM-NSW 4/2B5/6 2001 weekday 1, 26(24 h), 51(12 h), 76(8 h), 101(6 h)
weekend 1, 11(24 h), 21(12 h), 31(8 h), 41(6 h), 51(4.8 h)
6/4B7/8 2001 weekday 1, 26(24 h), 51(12 h), 76(8 h), 101(6 h)
weekend 1, 11(24 h), 21(12 h), 31(8 h), 51(4.8 h), 61(4 h), 81(3 h)
7/9B8/12 2001 weekday 1, 26(24 h), 51(12 h), 76(8 h), 101(6 h), 126(4.8 h)
weekend 1, 11(24 h), 21(12 h), 31(8 h), 41(6 h), 51(4.8 h), 81(3 h)
10/1B11/4 2001 weekday 1, 26(24 h), 51(12 h), 76(8 h), 101(6 h)
weekend 1, 11(24 h), 21(12 h), 31(8 h), 51(4.8 h)
11/5B12/9 2001 weekday 1, 26(24 h), 51(12 h), 76(8 h), 101(6 h)
weekend 1, 11(24 h), 21(12 h), 31(8 h), 41(6 h)

price–load relation because the effect of inter region x(n) is defined as

congestion on price would be reduced. Therefore the results

in Section 4 indicate that the percentage of periodic P
N
jðn1Þðk1Þ2p
X ðk Þ ¼ xðnÞ exp N k ¼ 1; :::; N ð1Þ
components in the NEM price signal is higher than that n¼1
in the ISO-NE price signal. In this analysis the regional pffiffiffiffiffiffiffi
prices and demands in the New South Wales (NSW) region where N is the number of data sample, j ¼ 1, and the
of NEM were adopted. integer k is defined as the bin number which gives the DFT
To avoid price risk exposure, the market architecture value X(k) corresponding to a specific frequency fk. For
in ISO-NE has moved from a single-settlement system to example, in the ISO-NE market, the data is sampled at once
a multisettlement system since 1st March 2003. The per hour, and the DFT has a length of 600 sample data,
multisettlement design consists of day-ahead and real-time which means that each bin is 0.001667(1/h) wide and the bin
markets, which allows market participants to secure number 26 is centred on the frequency of 0.041667 (1/h).
day-ahead prices in the financial market and reduce The mathematical functions among these values are given
their vulnerability to price fluctuations in the real-time by (2) and (3)
market. In Australia’s NEM, there is also a separate bin width ð1=hÞ¼sample rate ð1=hÞ =DFT length ð2Þ
futures market that is traded via the Sydney Futures
Exchange and the Australian Stock Exchange. This
hedging market trades futures contracts and runs in parallel bin frequency ð1=hÞ ¼ðbin number  1Þbin widthð1=hÞ
with the real-time power market. Therefore identifying ð3Þ
and understanding the price–load relationship in a real-time
market would enable market participants to make On the other hand, the inverse DFT (IDFT) that relates
more informed decisions about their bids and offers in samples from the frequency domain to the time domain is
financial hedging markets, such as day-ahead, hour-ahead, given by
futures, or forward markets.  
1X N
jðn  1Þðk  1Þ2p
x ð nÞ ¼ X ðk Þ exp n ¼ 1; :::N
4 Periodic components in electricity price and N k¼1 N
power demand ð4Þ
It is clear that the regular component of price dynamics The processing operation of the IDTF is similar to that of
is derived from load-driven effects. In this Section the the DFT except that the phase of the exponential is
periodic components in both price and load are obtained reversed. Figure 2 shows the frequency-domain character-
based on the discrete Fourier transform (DFT) algorithm istic of energy clearing prices (ECP) and system load for
[9, 10]. The Fourier transformation decomposes a waveform ISO-NE in December 2001; the horizontal line represents
into sinusoids of different frequencies that sum to the period and the vertical line is called the power spectrum of
original waveform. It is a useful tool to transfer price the signal, which represents power as a signal. Similarly the
and load signals from a time base to a frequency base. power spectrum of regional electricity price and load in
The discrete Fourier transform (DFT) of a discrete signal New South Wales, Australia is shown in Fig. 3.

IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004 443
 3000 It is clear from Figs. 2 and 3 that the time-series
of electricity prices or load can be transferred successfully
2500
into some specified frequencies in the frequency domain
2000
with the DFT algorithm. For example, the major periodic
power

components identified from Fig. 2a correspond to

1500 periods of 24 , 12, and 8 h. Comparing (a) and (b) in both
Figs. 2 and 3, one observes that the periodic signal in
1000 real-time electricity price is more complicated and much
vaguer than that with the real-time electricity load
500
because the time-series of real-time price is very volatile
0 and consists of a number of instant spikes. However, the
0 10 20 30 40 50 60 70 80 main periodic components in both price and demand are
period, h/cycle almost identical.
a In this work, the same frequency components between
prices and loads are identified according to their spectra
1.4
with bin numbers. For example, the spectra for weekday
1.2 hourly prices and loads are shown in Figs. 4a and 4b,
respectively. The observed data derived from the ISO-NE
power, × 106

1.0
involves successive five weekday data (600 h). In Fig. 4 the
0.8
first bin number in both power spectrums is called the
0.4 DC component of the signal, which represents the sum
0.6
of all discrete signals. The value of the DC component
is proportional to the average value of the original
0.2 signals. Other bin numbers, such as the 26th, 51st, 76th
0 and 126th, are the fundamental components of the
0 10 20 30 40 50 60 70 80 signal. These bin numbers are associated with specific
period, h/cycle
period components. For example, the 26th bin number
b

Fig. 2 Power spectra for electricity price and load signals in ISO-
NE market 10000
a Electricity price
b Electricity load
8000
1st

6000
power

26th 576th
3000
4000
2500
51st 551st
2000 2000 76th 526th
power

126th 476th
1500
0
1000 0 100 200 300 400 500 600
bin number
500 a

0 2.0
0 20 40 60 80 100 120 140 160
period, ½h /cycle
a
1.6
1st
1.4
power, × 106

1.2
1.2
1.0
power, × 106

26th 576th
0.8 0.8

0.4 51st 551st

0.6 0.4
101st 501st
0.2 126th
476th
0 0
0 20 40 60 80 100 120 140 160 0 100 200 300 400 500 600
period, ½h /cycle bin number
b b

Fig. 3 Power spectra for electricity price and load signals in Fig. 4 Spectral content of price and load variation with bin
NEM-NSW market numbers
a Electricity price a Electricity price
b Electricity load b Electricity load

444 IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004
(k ¼ 26 in (1)) represents the period of one day (24 h) 140
and the 76th bin number (k ¼ 76 in (1)) indicates the
120
period of eight-hour variation. From Fig. 4 it is evident
that there are similar periodic components appearing in the 100
price and load spectra. In this sample data the same
periodic components involve the bin numbers of 26th, 80

system price
51st, 126th, 476th, 551st and 576th. There is the symmetry 60
property that applies to the DFT of a real signal
sequence. The bin numbers of the DFT components from 40
1 to N/2+1 thus repeats from N/2+1 up to N in a mirror-
20
image fashion. This is proved in the Appendix (Section 9).
That is, the magnitude of bin 26 is identical to that of bin 0
576, bin 51 and bin 551 are the same, and bin 126 and
bin 476 are the same. Therefore above the bin number of −20
a
N/2+1 the DFT results would be redundant, and
thus these redundant bin numbers could be eliminated

system price with removing periodic components

from the spectra. 100
After extracting the periodic signals in the frequency
80
domain these same periodic signals in price and load could
be restored to the time domain by inverse Fourier 60
transformation based on (4). The results of restoring the
periodic and the random components of the price and load 40
signals to the time domain are illustrated in Figs. 5a to 5d,
respectively. In Figs. 5a and 5c the solid lines represent the 20
original curves and the dashed lines represent the main
periodic curves with the same frequency components 0
between prices and loads, respectively. Figures 5b and 5d
show, respectively, the random prices and random loads −20
derived from the residuals after filtering out the periodic −40
components. b
In addition to the above sample, other data of
prices and loads in both power markets have been used in 1.0
this paper to analyse the identical periodic components.
A total of ten-month price–load periodic relations in
ISO-NE and NEM-NSW are examined. The same periodic 1.7
system demand, MW × 104

bin numbers (and corresponding period values) between

loads and prices for each month are summarised in 1.5
Table 1. The bin numbers in the spectra indicate that
some specific frequencies exist between prices and demands
in both power markets. These periodic variations of prices 1.3
are derived from the variations of load with specific
frequency components. In this analysis the percentages of 1.1
average periodic components filtered by the DFT are 79.23
and 94.53% for the ISO-NE whole prices and loads,
respectively, and 82.36 and 96.77% for the NEM-NSW 0.9
whole prices and loads, respectively. Weekdays and c
weekends were considered separately because the ampli-
system demand with removing perodic components

4000
tudes on loads and prices on weekends were lower than
those on weekdays. 3000
Based on the identical bin numbers from historical
data, the effect of load variation on the periodic 2000
components of price appears to be predictable in advance.
For example, the fundamental spectrum components of
1000
weekday price signals in ISO-NE include the bin
numbers of 26 and 51, and in NEM-NSW market are
those of 26, 51, 76, and 101. The higher bins indicate 0

that the effect of loads on the periodic components of

the price is high. That is, the NEM-NSW represented a −1000
higher price–load periodic relation than that in the
ISO-NE because it implements better trading-interval and −2000
0 100 200 300 400 500 600
pricing models. In addition, the effect of load on price at time, h
weekends is lower than that in weekdays for the ISO-NE d
because the price signals were very fluctuant during
weekends. Removing these periodic signals, one could Fig. 5 Time-domain signals for periodic and random components
of price and load
determine the characteristics of the random component a Electricity price and its periodic component
in price and demand. Moreover, it is more objective to b Random price after removing periodic component
use the random component to estimate the volatility of c Electricity load and its periodic component
electricity price. d Random load after removing periodic component

IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004 445
5 Random components in electricity price and
load
In the previous Section identical periodic components are
identified and removed by DFT and IDFT. In this Section
the weekday random components after filtering out periodic
curves are analysed using correlation analysis. These
analyses of random components are based on the whole
data sample in 2001. In addition, the probability distribu-
tions of random electricity prices and random loads are
illustrated in this Section. Probability distribution can offer
traders a better idea of the ranges of variable movement as a
result of different periods and loads. For example, Table 2
shows the characteristics of random prices and loads by
using the probability distribution of variables on peak hours
(from 8:00 to 20:00) and off-peak hours (from 20:00 to 8:00).
prices during peak hours. However, these characteristics do
not exist in the random loads and the random price during
off-peak hours.
Furthermore, the correlation between random prices and
random loads has been analysed in this work. Statistical
results for ISO-NE 125 peak and 125 off-peak periods in
2001 whole sample data are presented, respectively, in
Figs. 6a and 6b, which are the probability distributions of
daily correlation coefficients between loads and prices.
1.0
0.8
cumulative
0.6

probability
The value of skewness measures the coefficient of asymmetry
of a distribution. If skewness is negative, the data are spread
out more to the left of the mean than to the right. The value 0.4
of kurtosis is a measure of whether the data are peaked or
flat relative to a normal distribution. Data sets with high 0.2
kurtosis tend to have a distinct peak near the mean and have
heavy tails. For a normal distribution the skewness and
kurtosis are, respectively, 0 and 3. Further, the Jarque–Bera 0
−1.0 −0.8 −0.6 −0.4 −0.2 0 0.2 0.4 0.6 0.8 1.0
statistic (JB) test is utilised to evaluate if the valuable has a
normal distribution. A distribution is normal when the value correlation coefficient
a
of JB is equal to 0. The JB value is defined as:
 
n 1 1.0
JB ¼ S 2 þ ðK  3Þ2 ð5Þ
6 4
where 0.8

P
n cumulative

Þ3
ðRi  R 0.6
probability

S ¼ i¼1 ð6Þ
ns3
0.4
P
n
4

Þ
ð Ri  R
K ¼ i¼1 ð7Þ 0.2
ns4
where n represents the sample size, S and K represent the 0
skewness and kurtosis, respectively, R and R
indicate the −1.0 −0.8 −0.6 −0.4 −0.2 0 0.2 0.4 0.6 0.8 1.0
presented variable and its average, and s represents the correlation coefficient
standard deviation of R. b
Based on the results in Table 2, the probability distribu- Fig. 6 Probability distribution for daily correlation coefficients for
tion of random electricity price on peak hours is skewed ISO-NE whole sample data
leftward with a median well below the mean, and a very a Peak hours
high kurtosis statistic. This is typical of random electricity b Off-peak hours

Table 2: Comparison of random prices and random loads based on peak and off-peak probability distribution for whole
samples in 2001

Power Item Duration Mean $, Median $, Max $, Min $, Std. dev. Skewness Kurtosis Jarque–
market MW MW MW MW Bera

price peak 0.06 1.76 90.51 40.5 12.28 2.31 13.91 1

ISO-NE off-peak 0.25 0.93 87.84 32.3 8.76 0.10 10.97 1
load peak 1.76 8.62 4363 5099 1312 0.19 5.19 1
off-peak 23.92 7.30 3989 3856 889.8 0.13 5.16 1

Power item duration Mean A$, Median Max A$, Min A$, Std. dev. Skewness Kurtosis Jarque–
market MW A$, MW MW MW A$, MW Bera
NEM- price peak 0.02 1.04 84.85  17.6 8.21 2.96 23.12 1
NSW off-peak 0.22 0.01 31.32 17.6 5.20 0.17 4.59 1
load peak 6.94 31.46 1629 2702 444.3 1.22 8.31 1
off-peak 10.8 23.93 1402 1927 354.6 0.68 6.23 1

446 IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004
 pffiffiffi
Comparing Figs. 6a and 6b, notice that higher correlation Table 4 Stratification by cum 3 f rule applied to random
between random loads and random prices exists in peak- load series
hour period. Table 3 gives a summary for the correlation p ffiffiffi pffiffiffi
analysis in both power markets for the whole data sample in Demand intervals (MW) Frequency (f) 3
f cum 3 f
2001. It also indicates the same conclusion that the price–
load correlation is higher in peak hours than in off-peak 5098.7B4625.6 6 1.8171 1.8171
hours. 4625.6B4152.6 10 2.1544 3.9716
In addition to the time factor, the amplitude of loads also 4152.6B3679.5 12 2.2894 6.2610
plays an important role affecting electricity prices. For 3679.5B3206.4 10 2.1544 8.4154
example, price spikes generally occur during peak loads. To
3206.4B2733.3 15 2.4662 10.8816
illustrate the distribution of electricity
pffiffiffiffi price in different load
levels, we utilised the cum 3 f rule to separate random 2733.3B2260.3 38 3.3620 14.2436
loads into the appropriate three groups ofpffiffiffi loads namely 2260.3B1787.2 73 4.1793 18.4229
ffi
low, medium and high strata. The cum 3 f rule is an 1787.2B1314.2 100 4.6416 23.0645
algorithm to determine the suitable stratum boundaries, 1314.2B841.10 225 6.0822 29.1467
and the detail about its theory is illustrated in [11, 12]. It is 841.10B368.10 389 7.2999 36.4466
in fact the cumulative sum of the cube root of the frequency
368.10B105.00 839 9.4316 45.8783
f of
p ffiffiffiffi load appearing in a given interval. Based on the cum
3 105.0B578.1 593 8.4014 54.2797
f rule, the first step is to arrange the load variable into an
ascending order, and the frequency of certain load appeared 578.10B1051.1 310 6.7679 61.0476
in each equal interval is measured. The second step is to 1051.1B1524.2 171 5.5505 66.5981
calculate the cube root of each frequency and to compute 1524.2B1997.3 73 4.1793 70.7774
the cumulative sum of them progressively. Finally, the 1997.3B2470.3 58 3.8709 74.6483
thresholds of each stratum are constructed
pffiffiffiffi on the basis of 2470.3B2943.4 30 3.1072 77.7555
forming equal intervals on the cum 3 f scale.
2943.4B3416.5 22 2.8020 80.5576
3416.5B3889.6 17 2.5713 83.1288
3889.6B4362.6 9 2.0801 85.2089
Table 3 Correlation analyses between random prices and
random loads for different periods for whole sample data in
2001
6000
Power market Time section Probability, % Probability, %
(correlation (correlation
4000
coefficient40.6) coefficient40.8)
threshold 2
(r2 = 578.1)
ISONE peak hour 43.2 15.2 2000
load, MW

periods
off-peak hour 24.2 5 0
periods
NEMNSW peak hour 56.8 22.4
periods
off-peak hour 36.7 4.2
periods
In our work the random loads in ISO-NE consist pffiffiffiffi of 3000
weekday hourly load data. Following the cum 3 f rule and
three
p ffiffiffiffi layers of strata setting, an equal interval on the cum
3
f scale could be calculated as 85.2089/3 ¼ 28.403
(Table 4), which yields the two threshold regions
r1 ¼ 13142.2 MW and r2 ¼ 578.1 MW. Figure 7 shows
the presented random pffiffiffiffi load series and selected threshold
regions by the cum 3 f rule. Therefore the random load is
divided into three strata: low stratum (5098.7B
1314.2 MW), medium stratum (1314.2B578.1 MW),
and high stratum (578.1B4362.6 pffiffiffiffi MW). In addition the
same procedure using cum 3 f rule has also been applied to
the random loads in NEM-NSW, and the threshold regions
are obtained as r1 ¼ 428.4 MW and r2 ¼ 113. MW.
Under each stratum in the random load series, the
distribution of corresponding electricity prices has been
analysed. The statistical result is shown in Table 5 based on
the whole data sample in 2001. According to the statistics in
this Table 6 the skewness value of random electricity prices
in high-load strata is high, which represents some price
spikes existing in the high-load strata. However, there are
also high random prices appearing at the low-load strata.
−2000
threshold 1
−4000 (r1 = −1314.2)
−6000
0 500 1000 1500 2000 2500 3000
time, h
pffiffiffiffi
Fig. 7 Selected threshold regions by cum 3 f rule applied to
random load series
For example, the peak price in the low-load stratum of
NEM-NSW reaches AUD $62.22 per MW. This price spike
cannot be explained with load alone; other factors should
be considered.
High random prices would result in high financial risk.
To quantify the risk in each load stratum of one could use
value at risk (VAR) as a measurement tool. VAR is a well-
known method of risk measurement [13]. Its definition is the
largest likely loss from market risk that an asset will suffer
over a time interval and with a degree of certainty selected
by the decision maker. In this paper the random price may
be regarded as an uncertainty variable because the
deterministic component of prices has been removed from
the original price data. In other words, the random price is
so difficult to predict that it can be regarded as the likely
loss. Therefore these historical random prices in each load
stratum have been directly used to evaluate the VAR with

IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004 447
Table 5: Comparison of characteristics of random prices in different load strata for whole samples in 2001

Power market Load stratum Mean ($) Median ($) Max ($) Min ($) Std dev. Skewness Kurtosis Jarque–Bera

ISO-NE low 10.26 9.45 25.12 40.48 7.44 0.37 6.34 1

medium 1.27 1.01 87.84 27.81 8.45 0.95 13.74 1
high 7.70 5.31 90.51 19.68 12.58 2.76 14.61 1
Power market demand stratum Mean (A$) Median (A$) Max (A$) Min (A$) Std. dev. Skewness Kurtosis Jarque–Bera
NEM- NSW low 3.38 3.47 62.22 15.55 6.28 4.60 44.90 1
medium 1.09 1.08 60.86 17.58 5.31 1.72 18.22 1
high 2.20 1.26 84.85 12.69 7.27 3.78 32.69 1

Table 6: VAR estimation for three demand strata on the relationship. The ANN method can establish the nonlinear
basis of different confidence levels for whole samples in relationship between price and other physical factors if there
2001 are sufficient historical data. However, compared with the
statistical method, the ANN method may be more
Power market Load stratum VAR 95% 99% complicated in implementation.
In addition, a static spectrum cannot fully describe the
ISO-NE low $0.24 $9.80
periodic components of prices and loads because the
medium $11.03 $19.85 spectrum content may change in time. This is the reason
high $27.04 $68.25 why there are still some similar partial trends between the
NEM-NSW low A$4.24 A$14.65 filtered components. For example, the filtered price signal
medium A$7.02 A$12.53 follows the trend of the filtered load signal from the 504th to
high A$12.08 A$30.30
the 576th hour in Figs. 5b and 5d, respectively. Time–
frequency analysis [14] could become a better representation
method to determine the frequencies and their relative
intensities as time progresses.
different confidence levels. The confidence level determined
by the decision maker is the probability value 1a
associated with a confidence interval a. A confidence 6 Volatility in electricity price and load
interval gives an estimated range of values that is likely to
include an unknown population parameter. Volatility is a new estimation technique for price variation
Figure 8 shows the probability distribution of random [15]. It measures the size of fluctuations in time-series.
prices in high-load stratum in ISO-NE, and the associated Traditionally the constant standard deviation is utilised as
VAR can be measured based on different confidence levels. the tool for evaluating price variation. However, the
Table 6 gives the values of VAR in different load strata with variation of time-series such as price and load signals
99 and 95% confidence levels for both power markets, appears to change over time. As an illustration, Fig. 9
respectively. In comparing the statistical VARs in Table 6 shows the changes of random price during four successive
note that VAR is almost proportional to load stratum. days from 2nd to 5th April in ISO-NE. From this graph
The statistical method is a direct way to analyse the observe that the change in price is quite stable from the 20th
relationship between price and load. It is easy to implement to the 40th hour period because it oscillates within a very
because only simple methods are needed. Moreover, the small range. However, the change in price fluctuates and
method is very flexible. It could be based on different load displays more volatility during other hours. Therefore the
levels, time periods, or price levels. ANN is another ability to model time-varying volatility is very significant.
suggested technique to construct the filtered price–load Moreover, a model of stochastic volatility is also useful
when estimating a fair price for a given financial option or
other volatility-dependent derivative [16].
0.14
20
0.12
15
0.10 VAR = 18.51 10
90% cofidence level
probability

0.08
5
VAR = 27.04 VAR = 68.25
price

0.06 90% cofidence level 99% cofidence level

0

0.04 −5

0.02 −10

−15
−20 0 20 40 60 80 100
−20
electricity price, S/MW 0 20 40 60 80 100
time, h
Fig. 8 Probability distribution of random prices in high-load
stratum and corresponding VAR based on different confidence levels Fig. 9 Random electricity price during four successive days (2nd
in ISO-NE to 5th April) in ISO-NE

448 IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004
 In a financial market, instead of the direct financial time- ‘heteroscedasticity’ represents a ‘changing variance’, and
series, volatility measurement is usually calculated from the the term ‘conditional’ indicates that the variance of time-
rate of financial returns. Therefore an important procedure series depends on past information. GARCH (p,q) models
before volatility analysis is to convert original prices to the residual of a time-series regression. Let et denote a real-
returns. The definition for the rate of financial return Rg is valued discrete-time stochastic process ct1 be the informa-
the logarithm of price ratio; that is Rg ¼ ln Ptln Pt1, tion set of all information through time t-1, and ht be the
where Pt and Pt1 are the prices at time t and t1, conditional variance. The GARCH (p,q) process [17] can be
respectively. In our work the same definition is utilised in expressed as
defining the rate of random electricity price returns. In the et jct1  N ð0; ht Þ ð8Þ
same manner, the rate of load log-scale difference Dg is
defined as Dg ¼ ln Ltln Lt1. Because these random X
q X
p
signals are the residuals after filtering out their periodic ht ¼ a0 þ aj e2tj þ bi hti ð9Þ
signals, these residuals can sometimes be negative. Thus an j¼1 i¼1
essential procedure is to shift all the random values to be
positive to meet the foregoing mathematical function. where a040, ajZ0, and biZ0. The simplest but often very
The rate of return for random electricity price in April useful process is the GARCH (1,1) process when both p and
2001 for the ISO-NE is illustrated in Fig. 10. Attention must q are set at one. A number of financial papers [18] have
be paid to the fact that the return series in Fig. 10 exhibits a reported that a simple GARCH (1,1) model can capture the
characteristic known as volatility clustering. That is, large volatility in most of financial returns. The typical GARCH
changes and small changes tend to have their own clusters. (1,1) model consists of a conditional mean model and a
In addition, a sample for the rate of load log-scale difference conditional variance model based on (10) and (11),
is shown in Fig. 11. In contrast to random price, the respectively. That is, the GARCH model is used to
fluctuation of random load is low. characterise the conditional distribution of random compo-
To evaluate the volatility for the random prices and nent et by imposing serial dependence on the past
random loads, we propose the GARCH (1,1) model to conditional variance of the returns
measure their volatility because these models are capable of y t ¼ g þ et et jct1  N ð0; ht Þ ð10Þ
capturing the volatility clustering observed in electricity
where
price returns. The generalised autoregressive conditional
heteroskedasticity (GARCH) model is often used for ht ¼ s2t ¼ a0 þ a e2t1 þ b s2t1 ð11Þ
evaluating financial market volatility [17]. The term
In (11) the volatility s2t depends on a constant a0, the last
period’s variance s2t1 and the last period’s innovation e2t1
2.0 (last period’s residual from the regression model); b is a key
persistence parameter: high b implies a high carry-over
1.5 effect of past to future volatility, while low b implies a
heavily damped dependence on past volatility. Equation
the rate of financial return

1.0
(11) is a recursive function and can be translated into (12). It
0.5
is clear from (12) that the volatility for time-series returns
can be determined by the sum of all past variances with
0 corresponding decaying factor bj. In other words, if the time
of variance in the past is close to the present its importance
−0.5 would be increased.

−1.0 s2t ¼a0 þ ae2t1 þ b a0 þ ae2t2 þ bs2t2

¼a0 þ ba0 þ b2 a0 þ ::: þ a e2t1 þ be2t2 þ b2 e2t3 þ :::
−1.5
0 100 200 300 400 500 600
a0 X1
time, h ¼ þa bj e2tj
1b j¼1
Fig. 10 Rate of electricity price returns in April 2001 for ISO-NE
ð12Þ
On the basis of the GARCH (1,1) model, the time-varying
0.20
volatility s2t on both prices and loads could be calculated
from the historical random component yt. The results for
the parameter estimations on GARCH (1,1) model are
the rate of load difference

0.10
given in Table 7. These parameters and volatility series are
estimated by using the maximum-likelihood algorithm
inside the GARCH toolbox. There is no direct measure
0 of real volatility because volatility is inherently unobser-
vable. In recent years some authors have proposed the use
of realised volatility [18] as a proxy for real volatility, which
−0.10 measures volatility without using any model. This algorithm
uses high-frequency returns, such as hourly returns, to build
directly an estimate of volatility at a lower frequency level,
−0.20 such as daily returns. However, it is not appropriate for our
0 100 200 300 400 500 600
applications because of insufficient intra-hour data.
time, h
An indication of the success of GARCH models is that
Fig. 11 Rate of load log-scale difference in April 2001 for there is no autocorrelation in the squared standardised
ISO-NE returns yt2 =s2t , which means the chosen model is capable of

IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004 449
 the rate of load difference and corresponding volatility
Table 7: Parameter estimations on GARCH (1,1) model for
0.20
volatilities of random prices and random loads
0.15
Power Series type Mean Variance equation
market equation 0.10
g a0 b a
0.05

ISO-NE load difference 0.0025 0.0013 0.3565 0.4173 0

price returns 0.00016 0.0056 0.5433 0.3309
−0.05
NEM-NSW load difference 0.00091 0.0001 0.5499 0.4444
price returns 0.0017 0.0016 0.3511 0.5477 −0.10

−0.15

capturing volatility clustering for the original returns [19] −0.20

0 100 200 300 400 500 600
because volatility clustering implies a strong autocorrelation
in squared returns. Figure 12 shows the autocorrelation time, h

function of the squared standardised returns based on the Fig. 14 Rate of random load log-scale difference and correspond-
ISO-NE filtered price returns for the whole sample data in ing volatility for ISO-NE, October 2001
2001. It indicates this signal is uncorrelated and therefore
proves that the GARCH (1,1) model is well-specified. The
GARCH (1,1) model was also proven to be suitable for coefficients between the volatility of prices and loads are
other filtered signals using the same diagnosis. obtained from the volatility measure results based on the
In Figs. 13 and 14 the thin lines show the rate of price GARCH (1,1) model. In addition the whole sample data in
returns and demand log-scale difference, respectively. The 2001 are utilised for this analysis. First, the correlation
corresponding volatility measured by the proposed between the volatilities of random prices and random loads
GARCH (1,1) model is shown by the thick line in both was analysed for daily peak and off-peak periods. The
figures. results are presented in Table 8. It can be seen that a higher
To evaluate the volatility relationship between random correlation exists in the NEM-NSW market. Moreover,
loads and random prices we make use of the probability there is no conspicuous correlation divergence between peak
distribution of correlation coefficients. These correlation and off-peak periods, which is different from the result for
the correlation between random loads and random prices as
described in Table 3.
Secondly, the correlation between the volatilities of
random loads and random prices based on different load
0.8
levels who also examined. The time-varying volatility
autocorrelation coefficient

for random p loads

ffiffiffiffi was divided into three levels and based
0.6 on the cum 3 f rule. On the basis of the three different
levels, we analysed the relationship between random
0.4 price volatility and random load volatility with the
probability distribution of correlation coefficients. The
0.2 probability that correlation coefficients are larger than
0.8 and 0.6 is examined, and the statistical results shown in
0 Table 9. It is observed form Table 9 that high-load volatility
can lead to high price volatility. On the other hand, the
−0.2 correlation between load volatility and price volatility is
0 5 10 15 20 25 30 35 40 very low in the low strata. This clearly supports the
lag nonexisting correlation between load and price volatilities in
Fig. 12 Autocorrelation function of squared standardised returns the low-load volatility level.
based on ISO-NE filtered prices Based on the results of Tables 1, 3, 8, and 9, the
price–load relationship in the NEM is higher than
that in the ISO-NE in both periodic and nonperiodic
the rate of price returns and corresponding volatility

0.6

0.4
Table 8: Correlation analysis between random price and
0.2 random load volatilities for different periods

0 Power Time section Probability, % Probability, %

market (correlation (correlation
−0.2 coefficient40.6) coefficient40.8)

−0.4 ISO-NE peak hour 12.80 2.4

periods
−0.6 off-peak 20.83 10.0
hour periods
−0.8
0 100 200 300 400 500 600 NEM-NSW peak hour 48.00 8.00
time, h periods
off-peak 43.33 18.33
Fig. 13 Rate of random price returns and corresponding volatility hour periods
for ISO-NE, October 2001

450 IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004
Table 9: Correlation analyses between random price volatility and random demand volatility according to different demand
strata
Power market Random demand Threshold region
stratum
ISO-NE high large than 0.2104
medium between 0.2104 and 0.0721
low less than 0.0721
NEM-NSW high large than 0.0576
medium between 0.0576 and 0.0283
low less than 0.0283
components. It appears that the regional prices calculated
during each half-hour period provide more stable price
signals, which have a high price–load relation feature. This
could be one of the reasons why the recent development of
power market designs has shown a trend moving from
uniform pricing (such as the UK electricity pool and the
pre-2003 ISO-NE market) and regional pricing (such as
the NEM and ERCOT market) to fully locational pricing
(such as the PJM, NY-ISO, and the post-2003 ISO-NE
market).
7 Conclusions
Analysis of the relationship between electricity prices and
loads is currently receiving a great deal of attention. In the
case of periodic components this paper provided empirical
supports for the view that identical bin numbers appear in
the spectra of prices and loads. The deterministic correlation
between prices and loads could be decided by these bin
numbers. In the random components it is obvious that
higher price–load correlation exists in peak hours based on
our statistical analysis. In addition, for the volatility relation
analysis between prices and loads the results show that there
is no conspicuous correlation divergence between peak and
off-peak periods. Nevertheless, electricity price volatility
inherits high-load volatility, but not in the case of low-load
volatility.
The results of the analysis of the price–load relationship
would change based on different market conditions. For
example, long-term contracts, high available capacity,
transfer capability and spinning reserves, and high stability
of fuel prices would contribute to a stable price trend, which
would form a strong relationship between prices and loads.
In this situation the periodic components on prices would
increase. However, unstable physical factors would lead to a
low relationship between prices and loads, which means
that the ratio of random prices would increase. In other
words, the ratio of periodic components on prices could be
regarded as an index to evaluate the market price stability.
This paper has provided a quantitative analysis
between price and demand. Its aim has been to highlight
a simple and useful statistical approach to discover the
price–load relationship. Market traders could incorporate
the statistical results and load forecasting into the pricing
module to predict electricity price. For example, during
peak hours the results of load forecasting could be taken
into account for price forecasting by using time-series
transfer functions or ANN because higher price–load
correlation exists in this period. A similar procedure
could also be applied to price volatility forecasting
during high-load volatility. In addition, the results could
support market traders to make useful decisions with
regards to their bids and offers in financial hedging
IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004
Probability, % (correlation Probability, % (correlation
coefficient40.6) coefficient40.8)
66.67 0
17.50 12.50
4.88 0
80 80
20.00 8.00
0 0
markets. For example, based on the statistical results the
VAR is proportional to power loads, which encourages
traders to purchase long-term forward contracts during
high-load periods to hedge against the risk of high prices.
Moreover, power suppliers for residential customers
could refer to these empirical statistics to implement real-
time pricing, which might bring the price-elasticity of
demand and reduce the need for generation capacity in the
power system.
The proposed approach is based on direct statistical
analysis. The contribution of this research is to provide a
simple and useful approach to evaluate the price–load
relationship. In addition, it presents a line of inquiry that
may lead to further analyses as follows.

The relationship analysis between prices and loads can be
extended to the combined time–frequency analysis, such as
Gabor or wavelet. This analysis provides a time-varying
spectrum, which allows one to determine which frequencies
exist at a particular time.

It is useful to incorporate the GARCH stochastic
volatility into the options model of electricity prices, which
could replace the traditional Black–Scholes valuation
model.

By reviewing the price stability index it may give system
operators some suggestions to improve their market
designs.
8 References
1 Cheung, K.W., Sun, D., Milligan, J., and Potishnak, M.: ‘Energy
and ancillary service dispatch for the interim ISO New England
electricity market’, IEEE Trans., Power Syst., 2000, 15, (3), pp.
968–974
2 Kian, A., and Keyhani, A.: ‘Stochastic price modeling of electricity in
deregulated energy markets’. Proc. 34th Hawaii Int. Conf. on System
Sciences, Hawaii, USA, 3–6 Jan., 2001, pp. 832–838
3 Yang, J., and Anderson, M.D.: ‘Dynamic pricing [of electricity]’,
IEEE Potentials, 2000, 18, (5), pp. 6–9
4 Jinxiang, Z., Jordan, G., and Ihara, S.: ‘The market for spinning
reserve and its impacts on energy prices’. Proc. IEEE Power
Engineering Society Winter Meeting, Singapore, 23–27 Jan., 2000,
Vol. 2, pp. 1202–1207
5 Vucetic, S., Tomsovic, K., and Obradovic, Z.: ‘Discovering price–load
relationships in California’s electricity market’, IEEE Trans., Power
Syst., 2001, 16, (2), pp. 280–286
6 Niimura, T., and Nakashima, T.: ‘Deregulated electricity market data
representation by fuzzy regression models’, IEEE Trans., Syst., Man,
Cybern., 2001, 31, (3), pp. 320–326
7 Mount, T.: ‘Market power and price volatility in restructured markets
for electricity’. Proc. 32nd Hawaii Int. Conf. on Systems Sciences,
Hawaii, 5–8 Jan., 1999, pp. 13–15
8 Managing energy price risk, (Risk Books, London , 1999, 2nd Edn.)
9 Mulgrew, B., Grant, P., and Thompson, J.: ‘Digital signal processing
Concepts and applications’ (Palgrave, Basingstoke, 2002)
10 Oran Brigham, E.: ‘Fast Fourier transform and its applications’,
(Prentice Hall, 1988, 1st Edn.)
11 Cochran, W.G.: ‘Sampling techniques’ (Wiley, Englewood Cliffs,
NJ, 1997)
12 Singh, R.: ‘Approximately optimum stratification on the auxiliary
variable’, J. Am. Stat. Assoc., 1971, 66, pp. 829–833
451
13 Alexander, C.: ‘Risk management and analysis, Vol 1: Measuring and the DFT (1), where roN/2. Then, (1) could be translated
modelling financial risk’, (Wiley, New York, 1999) into (13)
14 Cohen, L.: ‘Time–frequency analysis’, (Prentice Hall, Englewood
Cliffs, NJ, 1995, 1st Edn.)
15 Jarrow, R.: ‘Volatility: new estimation techniques for pricing
derivatives’ (Risk Books, London, 1998)
X
N  
16 Fouque, J.-P., Papanicolaou, G., and Sircar, K.R.: ‘Derivatives in jðn  1ÞðN  r  1Þ2p
financial markets with stochastic volatility’ (Cambridge University X ðN  rÞ ¼ xðnÞ exp
Press, New York, 2000) n¼1
N
17 Bollerslev, T.: ‘Generalized autoregressive conditional heteroskedasti-
XN  
city’, J. Econometr., 1986, 31, pp. 307–327 jðn  1Þðr þ 1Þ2p
18 Ser-Huang Poon, ., Clive, W.J., and Granger, .: ‘Forecasting ¼ xðnÞ exp
volatility in financial market: a review’, J. Econ. Lit., 2003, XLI, n¼1
N
pp. 478–539
19 Alexander, C.: ‘Market models: a guide to financial data analysis’ expðjðn  1Þ2pÞ
(Wiley, New York, 2001)  
XN
jðn  1Þðr þ 1Þ2p
¼ xðnÞ exp
n¼1
N
9 Appendix
ð13Þ
Proof of DFT Symmetry
To prove the symmetry properties of the DFT of a sampled
data sequence x(n) one could substitute k ¼ Nr into Therefore X(Nr) ¼ X*(r+2)

452 IEE Proc.-Gener. Transm. Distrib., Vol. 151, No. 4, July 2004