A structural model for electricity prices with spikes: Measurement of spike risk and optimal policies for hydropower plant operation

This paper proposes a new model for electricity prices based on demand and supply, which we call a structural model. We show that the structural model can generate price spikes that fits the observed data better than those generated by other preceding models such as the jump diffusion model and the Box-Cox transformation model. We apply the structural model to obtain the optimal operation policy for a pumped-storage hydropower generator, and show that the structural model can provide more realistic optimal policies than the jump diffusion model.