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Electricity price forecasting A review of the state-of-the-art.pdf

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International Journal of Forecasting 30 (2014) 1030–1081 Contents lists available at ScienceDirect International Journal of Forecasting journal homepage: www.elsevier.com/locate/ijforecast Review Electricity price forecasting: A review of the state-of-the-art with a look into the future Rafał Weron Institute of Organization and Management, Wrocław University of Technology, Wrocław, Poland a r t i c l e i n f o Keywords: Electricity price forecasting Day-ahead market Seasonality Autoregression
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  International Journal of Forecasting 30 (2014) 1030–1081 Contents lists available at ScienceDirect International Journal of Forecasting  journal homepage: www.elsevier.com/locate/ijforecast Review Electricity price forecasting: A review of the state-of-the-artwith a look into the future Rafał Weron Institute of Organization and Management, Wrocław University of Technology, Wrocław, Poland a r t i c l e i n f o Keywords: Electricity price forecastingDay-ahead marketSeasonalityAutoregressionNeural networkFactor modelForecast combinationProbabilistic forecast a b s t r a c t A variety of methods and ideas have been tried for  electricity price forecasting   (EPF) overthe last 15 years, with varying degrees of success. This review article aims to explain thecomplexity of available solutions, their strengths and weaknesses, and the opportunitiesand threats that the forecasting tools offer or that may be encountered. The paper alsolooks ahead and speculates on the directions EPF will or should take in the next decadeor so. In particular, it postulates the need for objective comparative EPF studies involving(i) the same datasets, (ii) the same robust error evaluation procedures, and (iii) statisticaltesting of the significance of one model’s outperformance of another. © 2014 The Author. Published by Elsevier B.V. on behalf of International Institute of Forecasters.This is an open access article under the CC BY-NC-ND license(http://creativecommons.org/licenses/by-nc-nd/3.0/). Contents 1. Introduction.......................................................................................................................................................................................... 10312. Literature query.................................................................................................................................................................................... 10322.1. Bibliometrics of ‘electricity price forecasting’ ....................................................................................................................... 10322.2. Major review and survey publications................................................................................................................................... 10343. What and how are we forecasting?.................................................................................................................................................... 10363.1. The electricity ‘spot’ price....................................................................................................................................................... 10363.2. Forecasting horizons................................................................................................................................................................ 10383.3. Evaluating point forecasts....................................................................................................................................................... 10383.4. Overview of modeling approaches......................................................................................................................................... 10393.5. Multi-agent models................................................................................................................................................................. 10403.5.1. Nash-Cournot framework........................................................................................................................................ 10403.5.2. Supply function equilibrium.................................................................................................................................... 10403.5.3. Strategic production-cost models ........................................................................................................................... 10413.5.4. Agent-based simulation models.............................................................................................................................. 10413.5.5. Strengths and weaknesses....................................................................................................................................... 10423.6. Fundamental models............................................................................................................................................................... 10423.6.1. Parameter-rich fundamental models...................................................................................................................... 10433.6.2. Parsimonious structural models.............................................................................................................................. 10433.6.3. Strengths and weaknesses....................................................................................................................................... 1044 E-mail address:  rafal.weron@pwr.wroc.pl.http://dx.doi.org/10.1016/j.ijforecast.2014.08.0080169-2070/ © 2014 The Author. Published by Elsevier B.V. on behalf of International Institute of Forecasters. This is an open access article under the CCBY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/).  R. Weron / International Journal of Forecasting 30 (2014) 1030–1081  1031 3.7. Reduced-form models............................................................................................................................................................. 10443.7.1. Jump-diffusion models............................................................................................................................................. 10453.7.2. Markov regime-switching models........................................................................................................................... 10473.7.3. Strengths and weaknesses....................................................................................................................................... 10493.8. Statistical models..................................................................................................................................................................... 10493.8.1. Similar-day and exponential smoothing methods................................................................................................. 10493.8.2. Regression models.................................................................................................................................................... 10503.8.3. AR-type time series models..................................................................................................................................... 10513.8.4. ARX-type time series models................................................................................................................................... 10523.8.5. Threshold autoregressive models............................................................................................................................ 10543.8.6. Heteroskedasticity and GARCH-type models ......................................................................................................... 10553.8.7. Strengths and weaknesses....................................................................................................................................... 10563.9. Computational intelligence models........................................................................................................................................ 10563.9.1. Taxonomy of neural networks................................................................................................................................. 10573.9.2. Feed-forward neural networks................................................................................................................................ 10573.9.3. Recurrent neural networks...................................................................................................................................... 10593.9.4. Fuzzy neural networks............................................................................................................................................. 10603.9.5. Support vector machines ......................................................................................................................................... 10603.9.6. Strengths and weaknesses....................................................................................................................................... 10604. A look into the future of ‘electricity price forecasting’...................................................................................................................... 10614.1. Fundamental price drivers and input variables..................................................................................................................... 10614.1.1. Modeling and forecasting the trend-seasonal components................................................................................... 10614.1.2. Spike forecasting and the reserve margin............................................................................................................... 10624.2. Beyond point forecasts............................................................................................................................................................ 10654.2.1. Interval forecasts ...................................................................................................................................................... 10654.2.2. Density forecasts....................................................................................................................................................... 10664.2.3. Threshold forecasting............................................................................................................................................... 10674.3. Combining forecasts................................................................................................................................................................ 10674.3.1. Point forecasts........................................................................................................................................................... 10684.3.2. Probabilistic forecasts............................................................................................................................................... 10704.4. Multivariate factor models...................................................................................................................................................... 10714.5. The need for an EPF-competition ........................................................................................................................................... 10734.5.1. A universal test ground............................................................................................................................................ 10734.5.2. Guidelines for evaluating forecasts ......................................................................................................................... 10744.6. Final word................................................................................................................................................................................. 1075Acknowledgments ............................................................................................................................................................................... 1075References............................................................................................................................................................................................. 1075 1. Introduction Since the early 1990s, the process of deregulation andtheintroductionofcompetitivemarketshavebeenreshap-ing the landscape of the traditionally monopolistic andgovernment-controlled power sectors. In many countriesworldwide, electricity is now traded under market rulesusing spot and derivative contracts. However, electricity isa very special commodity. It is economically non-storable,and power system stability requires a constant balancebetween production and consumption (Kaminski, 2013; Shahidehpour, Yamin, & Li, 2002). At the same time, elec-tricity demand depends on weather (temperature, windspeed,precipitation,etc.)andtheintensityofbusinessandeveryday activities (on-peak vs. off-peak hours, weekdaysvs.weekends,holidaysandnear-holidays,etc.).Ontheonehand,theseuniqueandspecificcharacteristicsleadtopricedynamicsnotobservedinanyothermarket,exhibitingsea-sonality at the daily, weekly and annual levels, and abrupt,short-lived and generally unanticipated price spikes. Ontheotherhand,theyhaveencouragedresearcherstointen-sify their efforts in the development of better forecastingtechniques.At the corporate level, electricity price forecasts havebecomeafundamentalinputtoenergycompanies’decision-making mechanisms (Bunn, 2004; Eydeland & Wolyniec, 2003; Weron, 2006). As the California crisis of 2000–2001 showed, electric utilities are the most vulnerable, sincethey generally cannot pass their costs on to the retailconsumers ( Joskow, 2001). The costs of over-/under- contracting and then selling/buying power in the balanc-ing(orreal-time)marketaretypicallysohighthattheycanlead to huge financial losses or even bankruptcy. Extremepricevolatility,whichcanbeuptotwoordersofmagnitudehigherthanthatofanyothercommodityorfinancialasset,has forced market participants to hedge not only againstvolume risk but also against price movements. Price fore-castsfromafewhourstoafewmonthsaheadhavebecomeof particular interest to power portfolio managers. A gen-erator,utilitycompanyorlargeindustrialconsumerwhoisabletoforecastthevolatilewholesalepriceswithareason-ablelevelofaccuracycanadjustitsbiddingstrategyanditsown production or consumption schedule in order to re-ducetheriskormaximizetheprofitsinday-aheadtrading.A variety of methods and ideas have been tried for electricity price forecasting   (EPF), with varying degrees of success. This review article aims to explain the complexityof the available solutions, with a special emphasis onthe strengths and weaknesses of the individual methods.In an attempt to determine which approaches are themost popular, In Section 2 we provide an overview of the  1032  R. Weron / International Journal of Forecasting 30 (2014) 1030–1081 existing literature on EPF, including a bibliometric studyof the Web of Science and Scopus databases, and a brief summary of the review/survey publications on this topic.InSection3,weexplainthemechanicsofpriceformationin electricity markets and define the main object of interest:the day-ahead electricity price. Next, following Weron(2006), we classify the techniques in terms of both the planning horizon’s duration and the applied methodology,andreviewthemostinterestingapproaches.Welookbackover the last 15 years of EPF, in an attempt to systematizethe rapidly growing literature. Then, in Section 4, we look ahead and speculate on the directions EPF will orshould take in the next decade or so. In particular, wepropose a universal test ground that all forecasters shoulduse in order to allow for direct comparisons between thedifferent studies, stress the importance of seasonality andfundamentals in EPF, and highlight some recent trends— interval and density forecasting, the ‘forgotten art’of combining forecasts, and the increasing popularity of multivariate factor models. 2. Literature query  There are essentially two ways to learn about a newresearch area. One is to perform a literature query usingone of the established databases and find the ‘hot topics’,the highly cited papers (hoping that they are ‘the influ-ential ones’), and the publishing trends. The other is toread a couple of review/survey papers, trusting that theyare unbiased, wide in scope and relatively up-to-date. Tohelp a newcomer to the field of   electricity price forecast-ing   (EPF), we have performed both a bibliometric analy-sis (Section 2.1) and a critical review of the review/survey publications that are out there (Section 2.2). 2.1. Bibliometrics of ‘electricity price forecasting’  In this section, we report on the bibliometric analysiswe performed on 10 May 2014 using two well-establishedand generally acknowledged databases:  Web of Science (WoS) and  Scopus . The results do differ quantitatively, asthecollectionsofpublicationsindexedbyWoSandScopusare not the same, but do not differ qualitatively. Generally,WoSisasubsetofScopus,meaningthatwecouldlimitouranalysistoWoSonly.However,theScopussearchengineismore user-friendly and allows for more refined queries. If we limit our search to journal articles published in Englishonly, then the differences between the databases are notthat significant. We will first present general results forboth databases, then more specialized queries for Scopusonly. We should also note that the choice of these twodatabases has its limitations, most notably the fact thatsome of the newer journals, like the  Journal of EnergyMarkets , are not indexed in these systems.In Fig. 1, we plot the numbers of WoS- and Scopus- indexed EPF publications in the years 1989–2013. 1 Theoverall numbers of publications are 304 for WoS and 1To search publication titles, abstracts and keywords for ‘electricityprice forecasting’-related phrases, we have used the following WoS 497 for Scopus, of which 136 (45%) and 206 (41%),respectively, are journal articles. Articles indexed withinthe Web of Science refer to journals listed in the JournalCitation Reports only, while the collection of Scopus-listed journals is much richer. Both databases are constantlybeingexpandedtocovermorevolumesofproceedings,butthe numbers are still much less representative of the truenumber of conference papers than is the case for journalsand journal articles. The Scopus-indexed collection of reviews, conference reviews, books and book chaptersis even less complete. Hence, in what follows, we willconcentrate mostly on journal articles.Except for a few isolated cases, EPF publicationsdid not appear in the literature before the year 2000.The next major breakthrough occurred in the years2005 and 2006, when the number of publications firstdoubled, then tripled with respect to 2002–2004 figures.Initially, this increased inflow of EPF publications was duemostly to proceedings (WoS terminology) or conference(Scopus terminology) papers; journal articles followedwith a delay. The overall publication rate increased until2009 / 2010,thendroppedto2006–2008levelsbecauseofareducednumberofconferencepapers.Asof2013,thetopicseemstohavesaturatedtheresearchcommunity,althoughthe number of citations is still increasing, as can be seenin Fig. 2. Possibly a new fundamental impulse – like the deregulation of the late 1990s or the increased volatilityof electricity spot prices in the mid-2000s – is needed inorder to propel electricity price forecasting to a new levelof publication intensity.As far as subject categories are concerned, most of thearticles have appeared in journals classified by Scopusas  Engineering   or  Energy , followed by  Computer Science , Mathematics ,  Business, Management & Accounting   and Economics, Econometrics & Finance . It is also interesting tosee which outlets are the most popular for EPF articles.Clearly, the number one journal is  IEEE Transactionson Power Systems , with 33 publications (out of 206indexed by Scopus), see Fig. 3. Interestingly, the share of ‘neural network’-type (more generally: artificial orcomputational intelligence) methods and statistical timeseries models is equal in this collection: nine ‘neuralnetwork’ papers, nine ‘statistical time series’ papers, fourpapers where both approaches have been used and 11papers where neither ‘neural network’ nor ‘statisticaltime series’ methods have been used. It should be notedthat the classification was automatic and may includesome errors. For ‘neural network’-type papers, the Scopusquery given in footnote 1 was modified to include query: TS=(((‘‘forecasting electricity OR ‘‘predictingelectricity ) AND (‘‘electricity spot’’ OR ‘‘elec-tricity day-ahead’’ OR ‘‘electricity price’’)) OR((‘‘price forecasting’’ OR ‘‘price prediction’’OR ‘‘forecasting price’’ OR ‘‘predicting price’’OR ‘‘forecasting spikes’’ OR ‘‘forecasting VAR’’)AND (‘‘electricity spot price’’ OR ‘‘electricityprice’’ OR ‘‘electricity market’’ OR ‘‘day-ahead market’’ OR ‘‘power market’’))) ; and the equivalent Scopusquery: TITLE-ABS-KEY(...) .Alllook-upshavebeenrefinedfurthertoexclude non-English language texts or to include only specific documenttypes.  R. Weron / International Journal of Forecasting 30 (2014) 1030–1081  1033 Fig. 1.  The numbers of WoS- (left panel) and Scopus-indexed (right panel)  electricity price forecasting   (EPF) publications in the years 1989–2013. Allpublications prior to the year 2000 (three for WoS, three for Scopus) have been aggregated into one category, ‘ < 2000’. Fig. 2.  The numbers of WoS- (left panel) and Scopus-indexed (right panel) EPF journal articles and citations of those articles in the years 1989–2013. Allarticles prior to the year 2000 (one for WoS, three for Scopus) have been aggregated into one category, ‘ < 2000’; i.e., the first bin. Note that the numbers of citations are roughly 25 times higher than the numbers of articles. Fig. 3.  The numbers of Scopus-indexed EPF articles published in the years 2000–2013 in the ten most popular journals. ‘Neural network’-type models aremore often published in electrical engineering journals, while statistical time series models tend to be published in  Energy Economics ,  International Journalof Forecasting  ,  Applied Energy  and  Energy Policy .
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