Forecasting day-ahead electricity prices in Europe: the importance of considering market integration

Motivated by the increasing integration among electricity markets, in this paper we propose three different methods to incorporate market integration in electricity price forecasting and to improve the predictive performance. First, we propose a deep neural network that considers features from connected markets to improve the predictive accuracy in a local market. To measure the importance of these features, we propose a novel feature selection algorithm that, by using Bayesian optimization and functional analysis of variance, analyzes the effect of the features on the algorithm performance. In addition, using market integration, we propose a second model that, by simultaneously predicting prices from two markets, improves even further the forecasting accuracy. Finally, we present a third model to predict the probability of price spikes; then, we use it as an input in the other two forecasters to detect spikes. As a case study, we consider the electricity market in Belgium and the improvements in forecasting accuracy when using various French electricity features. In detail, we show that the three proposed models lead to improvements that are statistically significant. Particularly, due to market integration, predictive accuracy is improved from 15.7% to 12.5% sMAPE (symmetric mean absolute percentage error). In addition, we also show that the proposed feature selection algorithm is able to perform a correct assessment, i.e. to discard the irrelevant features.