Forecasting the occurrence of electricity price spikes in the UK power market

We study the forward looking information that is available to all participants in the UK power market and measure its predictive value with respect to forecasting the occurrence of electricity price spikes. We focus on information that measures the extent to which the capacity of the UK generation park will be constrained over the next two weeks. Following Cartea et al. (2009) we use a measure of 'tight market conditions', based on predicted capacity constraints, which identifies the periods when price spikes are more likely to occur. Considering a longer and a more recent time period (1.1.2006-31.12.2012), we find that irrespective of the spike identification algorithm the probability of observing a spike is roughly an exponentially increasing function of the demand-to-capacity ratio.