Operating Activities of Energy Companies in the Context of Crude Oil Risk and its Impact on the Polish Power Exchange

Aneta Joanna Wlodarczyk, Iwona Otola, Marlena Grabowska

Abstract


Different factors have significant impact on the development of the Polish Power Exchange and the volatility of electricity contracts prices, which are quoted on this part of energy market. The electricity prices are strongly influenced by such determinants as: the level of turnover volume, fuel prices, weather conditions, the CO2 emission allowance prices, political situation, the changeability of the energy demand level, available power in the National Electricity System. Therefore, we are interested in the study of the impact of crude oil risk on the electricity price volatility in Poland. In the first part of the article the most important determinants of price risks in the crude oil market are presented, due to the meaning of this commodity market for the economy development, the energy safety issue and its investment attractiveness. Next, we present the main factors causing the increase of participants’ interest of the Polish Power Exchange. Then we analyse the volatility dynamics of following time series: the West Texas Intermediate crude oil (WTI) prices, which are denominated into PLN and the electricity prices quoted on the Day-Ahead Market of Polish Power Exchange in the period of 2004-2014. Empirical analysis is connected with construction of univariate Markov switching heteroskedasticity models with mean-variance component structure as well as with GARCH structure for each of analyzed variables. The Markov regime-switching model can detect switches in the volatility regimes of the returns and measure average duration of each variables in high- and low- volatility states. The next step of the empirical analysis is connected with evaluation similarity level of switch occurrences between the regime of high and low volatility for time series of WTI crude oil prices and electricity prices in Poland. This evaluation will be conducted on the basis of estimates of Pearson linear correlation coefficients for smoothed probabilities of high volatility regimes referring to the crude oil market and the Polish Power Exchange. We also use the concordance index in order to make a comparison of the occurrence of higher risk periods on both analyzed markets. Conducted in this paper econometric analysis help us to evaluate the synchronization of occurrence of higher price risk periods on crude oil market and the POLPX and also provides important information about the risk associated with the electricity contracts that have been concluded on the Day-Ahead Market of  the POLPX. We also determine the start and the end of the periods corresponding to high prices volatility on each commodity market and compare them with the occurrence of the important political or economic events in the world and relate them to the operating  activities of energy companies.


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