On transition probabilities of regime switching in electricity prices’, Energy Economics, forthcoming

In this paper, we analyze transition probabilities of regime switching in electricity prices based on supply and demand using the structural model of Kanamura and ¯Ohashi (2004). We show that the transition probabilities depend on the demand level and thus are not constant. This result contrasts sharply with the results of many electricity price models that assume constant transition probabilities among different regimes. We also estimate the model using historical data from the PJM market, and empirically analyze the seasonality of the transition probabilities. The results obtained here are consistent with the observed characteristics of price spikes in electricity markets where spikes tend to occur in summer and winter when the demand level is high. These results support the argument by Lucia and Schwartz (2002) that asserts the importance of seasonality in modeling electricity prices