Modelling Australian Electricity Prices Using Indicator Saturation

We employ the indicator saturation approach on electricity price series from the National Electricity Market (NEM) in Australia to simultaneously model the stylised facts of electricity prices, including extreme spikes, seasonality, level-shifts, and autocorrelation. Standard modelling methods in the literature to cope with these characteristics tend to be regime-switching models, but they cannot fully reflect those stylised facts. Based on a range of model-evaluation tools, our analysis finds that the indicator saturation method outperforms the regime-switching models in various settings. In additional to the statistical superiority, we further link the results from the indicator saturation to policy changes in the NEM and provide recommendations for the development of the electricity markets in Australia