Combining day-ahead forecasts for British electricity prices

This paper considers how well the approach of combining forecasts extends to the context of electricity prices. With the increasing popularity of regime switching and time-varying parameter models for predicting power prices, the multi model and evolutionary considerations that usually support the combining of simpler time series methods may be less applicable when the individual models incorporate these features. We address this question with a backtesting analysis on British day-ahead prices. Furthermore, given the volatility of power prices and concerns about accurate forecasting under extreme price excursions, we evaluate the results using various error metrics including expected shortfall. The comparisons are furthermore carefully simulated to consider model selection uncertainty in order to realistically test the value of combining as an ex ante policy. Overall, our results support combining for both accurate operational planning and risk management.