A spot-forward model for electricity prices with regime shifts

We propose a novel regime-switching approach for the simulation of electricity spot prices that is inspired by the class of fundamental models and takes into account the relation between spot and forward prices. Additionally the model is able to reproduce spikes and negative prices. Market prices are derived given an observed price forward curve, and spikes may occur with a certain probability. To this end, we distinguish between a base regime and an upper as well as a lower spike regime. The model parameters are calibrated using the historical hourly price forward curves for EEX Phelix and the dynamics of hourly spot prices. We further evaluate different time series models such as ARMA and GARCH that are usually applied for modeling electricity prices and conclude a better performance of the proposed regime-switching model.