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Hidden Predictability

Mining price signals in Ontario’s electricity market.

Fortnightly Magazine - October 2013
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what future periods might the predictability persist?

The most obvious inference is that the collective offering-in strategies of suppliers to the Ontario market reflect a preference for monthly average prices. The source of this preference could be as prosaic as the settlement process for Ontario’s market. The IESO settles accounts on a monthly cycle, so it could be that those engaged in offering in align their strategies in such a way as to match monthly expectations. Interestingly, the MPMA, described above, which was designed to curb OPG’s presumed market power, would appear to have had little relevance to the price signals that actually occurred in Ontario’s market. The close correspondence of the simulation with observed HOEP exists throughout the earlier period while the MPMA was in effect and later when it wasn’t as well as a significant price excursion in 2005 and sudden and persistent fall beginning in January 2009.

While we haven’t undertaken a monthly analysis of Ontario’s neighboring jurisdictions, the plot of annual prices shown in Figure 5 are indicative of a close correspondence of prices. In all control areas prices dropped sharply together with the onset of the 2009 recession and have remained low since. This finding suggests that a monthly analysis of prices in these jurisdictions might be worth pursuing.

Endnotes:

1. New Palgrave Dictionary of Economics, 2nd edition, Durlauf, S. N.and Blume, L. E., Palgrave Macmillan 2008.

2. While Ontario Hydro distributed electricity to most of rural Ontario it also supervised about 300 municipal distributors.

3. The Energy Competition Act, 1998

4. For completeness, OPG has also leased four Hydroelectric plants on the Mississagi River with a combined capacity of about 500 MW.

5. For a brave attempt to predict how the MPMA would affect OPG see, Goulding, A.J et al, “Dancing with Goliath: Prospects after the Breakup of Ontario Hydro,” Public Utilities Fortnightly , March 1, 2001, 22-33

6. Page 74.

7. For an extensive survey, see Higgs, H. and Worthington, A.C., “Modelling Spot prices in Deregulated Wholesale Electricity Markets: A Selected Empirical Review,”  Energy Studies Review 17(1) 2010, 1-22.

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