Short-Term Electricity Prices Forecasting Using Functional Time Series Analysis

Abstract

In recent years, efficient modeling and forecasting of electricity prices became highly important for all the market participants for developing bidding strategies and making investment decisions. However, as electricity prices exhibit specific features, such as periods of high volatility, seasonal patterns, calendar effects, nonlinearity, etc., their accurate forecasting is challenging. This study proposes a functional forecasting method for the accurate forecasting of electricity prices. A functional autoregressive model of order P is suggested for short-term price forecasting in the electricity markets. The applicability of the model is improved with the help of functional final prediction error (FFPE), through which the model dimensionality and lag structure were selected automatically. An application of the suggested algorithm was evaluated on the Italian electricity market (IPEX). The out-of-sample forecasted results indicate that the proposed method performs relatively better than the nonfunctional forecasting techniques such as autoregressive (AR) and naïve models.

Keywords

• functional autoregressive model
• functional principle component analysis
• vector autoregressive model
• functional final prediction error (FFPE)
• naive method