A Machine Learning approach to Risk Minimisation in Electricity Markets with Coregionalized Sparse Gaussian Processes

by   Daniel Poh, et al.

The non-storability of electricity makes it unique among commodity assets, and it is an important driver of its price behaviour in secondary financial markets. The instantaneous and continuous matching of power supply with demand is a key factor explaining its volatility. During periods of high demand, costlier generation capabilities are utilised since electricity cannot be stored---this has the impact of driving prices up very quickly. Furthermore, the non-storability also complicates physical hedging. Owing to this, the problem of joint price-quantity risk in electricity markets is a commonly studied theme. To this end, we investigate the use of coregionalized (or multi-task) sparse Gaussian processes (GPs) for risk management in the context of power markets. GPs provide a versatile and elegant non-parametric approach for regression and time-series modelling. However, GPs scale poorly with the amount of training data due to a cubic complexity. These considerations suggest that knowledge transfer between price and load is vital for effective hedging, and that a computationally efficient method is required. To gauge the performance of our model, we use an average-load strategy as comparator. The latter is a robust approach commonly used by industry. If the spot and load are uncorrelated and Gaussian, then hedging with the expected load will result in the minimum variance position. The main contribution of our work is twofold. Firstly, in developing a multi-task sparse GP-based approach for hedging. Secondly, in demonstrating that our model-based strategy outperforms the comparator, and can thus be employed for effective hedging in electricity markets.


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