Semi‐parametric Forecasting of Spikes in Electricity Prices

The occurrence of extreme movements in the spot price of electricity represents a significant source of risk to retailers. A range of approaches have been considered with respect to modelling electricity prices; these models, however, have relied on time‐series approaches, which typically use restrictive decay schemes placing greater weight on more recent observations. This study develops an alternative, semi‐parametric method for forecasting, which uses state‐dependent weights derived from a kernel function. The forecasts that are obtained using this method are accurate and therefore potentially useful to electricity retailers in terms of risk management.