Econometric Modeling of Electricity Prices

In the previous chapter we noted that the main scope of an econometric model is that of describing in the best possible way the interrelation exist­ing among different economic variables. Applying this idea to the study of electricity price dynamics we have the possibility to investigate the rela­tion that links electricity prices (dependent variable of the model) to other economic drivers such as, for example, electricity consumption. This rela­tionship can be expressed in mathematical terms by a simple and generic functional representation of the following type: <m:math display=&#x2019;block&#x2019;> <m:mrow> <m:msub> <m:mi>E</m:mi> <m:mi>t</m:mi> </m:msub> <m:mo>=</m:mo><m:mi>f</m:mi><m:mrow><m:mo>(</m:mo> <m:mrow> <m:msub> <m:mi>X</m:mi> <m:mrow> <m:mi>i</m:mi><m:mi>t</m:mi> </m:mrow> </m:msub> </m:mrow> <m:mo>)</m:mo></m:mrow> </m:mrow> </m:math>]]</EquationSource><EquationSource Format="TEX"><![CDATA[{E_t} = f\left( {{X_{it}}} \right)where Xi represents the value of the i-th generic explanatory variable.