Fundamental drivers of electricity prices in the pacific northwest

Chi Keung WOO, Ira HOROWITZ, Nate TOYAMA, Arne OLSON, Aaron LAI, Ray WAN

Research output: Chapter in Book/Report/Conference proceedingChapters

14 Citations (Scopus)


We estimate an AR(1)/GARCH(1, 1) model that shows the impact of natural-gas prices, hydro conditions, and temperatures on wholesale on-peak electricity prices at the Mid-Columbia (Mid-C) trading hub in the Pacific Northwest of the United States. After controlling for the effects of these three factors, prices are seen to exhibit a weak seasonal pattern, but a strong day-of-week pattern. It is also shown that price spikes can persist for several days. Finally, in support of the GARCH hypothesis, Mid-C prices are seen to have a time-dependent variance that primarily moves with natural-gas prices, and that large price variances tend to persist. Thus, even though buyers might cross hedge using natural-gas futures and temperature-based weather futures, the effectiveness of any hedge is compromised by randomness in hydro conditions. To be sure, a buyer can eliminate the electricity price risk by entering into a forward contract, but only at the expense of what is likely to be a large risk premium embodied in the forward price. Copyright © 2007 by World Scientific Publishing Co. Pte. Ltd.
Original languageEnglish
Title of host publicationAdvances in quantitative analysis of finance and accounting
EditorsCheng-Few LEE
Place of PublicationHackensack, NJ
PublisherWorld Scientific Publishing Co.
ISBN (Electronic)9789812772213, 9789814475549
ISBN (Print)1281911976, 9786611911973, 9812772219, 9789812706287
Publication statusPublished - Jul 2007


Woo, C.-K., Horowitz, I., Toyama, N., Olson, A., Lai, A., & Wan, R. (2007). Fundamental drivers of electricity prices in the pacific northwest. In C.-F. Lee (Ed.), Advances in quantitative analysis of finance and accounting (Vol. 5, pp. 299-323). Hackensack, NJ: World Scientific Publishing Co.


  • Electricity
  • Price volatility


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