Joint Component Estimation for Electricity Price Forecasting Using Functional Models

Abstract

This work considers the issue of modeling and forecasting electricity prices within the functional time series approach. As this is often performed by estimating and predicting the different components of the price dynamics, we study whether jointly modeling the components, able to account for their inter-relations, could improve prediction with respect to a separate instance of modeling. To investigate this issue, we consider and compare the predictive performance of four different predictors. The first two, namely Smoothing Splines-Seasonal Autoregressive (SS-SAR) and Smoothing Splines-Functional Autoregressive (SS-FAR) are based on separate modeling while the third one is derived from a single-step procedure that jointly estimates all the components by suitably including exogenous variables. It is called Functional Autoregressive with eXogenous variables (FARX) model. The fourth one is a combination of the SS-FAR and FARX predictors. The predictive performances of the models are tested using electricity price data from the northern zone of the Italian electricity market (IPEX), both in terms of forecasting error indicators (MAE, MAPE and RMSE) and by means of the Diebold and Mariano test. The results point out that jointly estimating the components leads to significantly more accurate predictions than using a separate instance of modeling. In particular, the MAE, MAPE, and RMSE values for the best predictor, based on the FARX(3,0,4) model, are 4.25, 9.28, and 5.38, respectively. The percentage error reduction is about 20% with respect to SS-SAR(3,1) and about 10% with respect to SS-FAR(5). Finally, this study suggests that the forecasting errors are generally higher on Sunday and Monday, from hours 3 to 6 in the morning and 14 to 15 in the afternoon, and in June and December. On the other hand, prices are relatively lower on Wednesday, Thursday, and Friday, from hour 20 to 1 a.m., and in January and February.

Keywords

• electricity prices
• functional autoregressive model
• functional autoregressive with exgenous variables model
• functional principal components
• vector autoregressive model