INTRODUCTION

Energy price forecasting (EPF) is the process of using mathematical models to predict what

electricity prices will be in the future. EPF is an extremely important factor in the utilities’ decision

making process.

There is short-, medium- and long-term forecasting.

• Short-term forecasting, generally involves horizon from a few minutes up to a few days

ahead and is of prime importance in day-to-day market operations.

• Medium-term forecasting, from a few days to a few months ahead, is generally preferred for

balance sheet calculations, risk management and derivatives pricing.

• Long-term forecasting, with lead times measures in months, quarters or years,

concentrates on investment profitability analysis and planning.

Short industry description and background to the topic

Electricity (energy commodity) is traded on the wholesale market. Suppliers (electricity

generators) and demanders (retailers) are active on the wholesale electricity market. They meet on

the power exchange. Electricity generators disclose the amount of power they are willing to sell for

a given price and demanders disclose the amount of power they are prepared to buy for a given

price. As electricity cannot be stored economically, the electricity market has a highly volatile

character. That is why electricity price forecasting has to be based on reliable models that take

into account all major factors affecting the price.

Glossary

Wholesale Market: Electricity (energy commodity) is traded on the wholesale market. Suppliers

(electricity generators) and demanders (retailers) are active on the wholesale electricity market.

Retail Market: Retailers purchase significant volumes of electricity in the wholesale market and

sell packages of smaller volumes to its customers.

A spot price is the current price in the marketplace at which a given asset such as a security,

commodity or currency can be bought or sold for immediate delivery.

A forward price is the predetermined delivery price for an asset decided upon by the long (the

buyer) and the short (the seller) to be paid at predetermined date in the future.

Price volatility

Liquidity