Title: Understanding the drivers of electricity prices in the day-ahead market: A factor analysis approach Authors:  Eleftheria Paschalidou - Aristotle University of Thessaloniki (Greece) [presenting]
Nikolaos Thomaidis - University of the Aegean (Greece)
Abstract: The purpose is to investigate the dynamics between day-ahead electricity prices and their underlying fundamental drivers in the Spanish day-ahead market. Blending structural dynamic factor models (SDFM) with fractionally integrated vector autoregressive (FIVAR) techniques, it unravels complex relationships between hourly prices and most of their key determinants (average surface temperature, load, renewable energy injection, conventional power natural gas price and the CO2 emission rights market value). At the core of the analysis lies the multi-level factor modelling device that explains the covariation of observables based on their exposure to common orthogonal (lagged uncorrelated) components. Subsequently, the FIVAR model captures long memory effects in the dynamic interactions between electricity prices and fundamental drivers. Preliminary results underscore the effectiveness of this integrated approach in capturing nuanced dynamics within the Spanish electricity market. Notably, the analysis reveals that fundamental shocks are absorbed slowly (at a hyperbolic rate), a finding which is consistent with the long-range dependency behavior typically observed in energy indices. Overall, results support the hypothesis that variations in wholesale day-ahead electricity prices are primarily rational, i.e. they can be effectively explained by shifts in fundamental drivers.