Over the past years, many countries have begun major structural reforms of their electricity markets. Traditionally, most generation plants have sold electricity under long-term power sales agreements to electric utilities or state-owned power companies. These ongoing reforms are aimed at breaking up traditional regional or national monopolies, through a process of unbundling, and replacing them with several generation, distribution and supply utilities that interact through a wholesale market. Although remarkable differences might exist, in each case it is hoped that the end result is a decline in the price of electricity to end users and prices reflecting the actual costs involved. Meanwhile, spot price varies continuously according to several factors: the volatility of fuel prices such as gas and oil, the availability of resources such as water, the availability of power plants because of planned and unplanned outages as well as the demand for electricity, among others. There are no generally accepted quality solutions for the electricity spot price forecasting. This is partly because the empirical properties of the price differ across markets, partly because ongoing market reform means there is continual fundamental change in the dynamics of prices, and partly because they exhibit complex volatility patterns. Unfortunately, building a statistical model for the electricity spot price is not straightforward. Traditional financial-based models of asset prices ignore the nature of the good being priced. Electricity is a commodity that is predominantly instantaneous and must be consumed at the time of generation which affect the price formation dynamics. In addition to price forecasts, in this new competitive era market participants need to assess accurate information to manage risk. Actually, electricity markets are known for their high short-term volatility relative to that observed in the markets for more traditional commodities. Using a GARCH type time series model we will provide some empirical evidence on the spot price volatility of the Spanish electricity market, with the purpose of drawing some insights on the relationship between market rules and price behaviour in the forthcoming Iberian electricity wholesale market ¿ MIBEL.
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