Volatility Modeling for EMCALI Electricity Prices

The term "price volatility"is used to describe price fluctuations in asset prices. Prices of basic energy (natural gas, electricity, heating oil) are generally more volatile than prices of other commodities. Volatility indicates a measure of price uncertainty in markets. When volatility rises, firms may delay investment and other decisions or increase their risk management activities such as hedging. The costs associated with such activities tend to increase the costs of supplying and consuming energy. The main goal of this paper is to build a volatility model and demonstrate a mechanism to forecast electricity price volatility using electricity distribution of EMCALI ("Empresses Municipals de Cali") in Colombian electricity market. The objectives of this study are threefold: 1) First we begin our approach by introducing the energy market in Colombia and EMCALI's role in generation and distribution of electricity. 2) Next we discuss some of the more widely used time series techniques and also show how we can utilize generalized autoregressive conditional heteroscedastic (GARCH) volatility model as a volatility forecasting model for the energy price in Colombia. 3) Finally, we apply this model to estimate the behavior of the electricity price volatility and discuss the results obtained. The paper ends with conclusions.