A Method of Forecasting Wholesale Electricity Market Prices

In this paper we employ a fundamental principle of classical mechanics known as the Least Action Principle to model the complex relationship between expected load and expected price in electricity spot markets. We consider here markets that feature a centralised electricity dispatch system that optimises grid parameters to determine the minimum spot nodal prices. Using the example of the Australian National Electricity Market (NEM) and a calibrated stochastic demand model, we develop the mathematical approach that determines the price evolution including intra-day and seasonal features. The proposed model links the concept of a deterministically-modelled price with a stochastically-modelled demand. The demand-price relationship is complex, and must include not only the level of demand within the constraint of maximum generating capacity, but also the change in demand within the constraints of generator ramping rates. While this paper uses the NEM as an example, the proposed approach is applicable to any energy market that satisfies the above conditions.