Stochasticity in electricity markets : Combining system dynamics with financial economics

1 Abstract In this paper, we combine a fairly complex system dynamics model of the Nord Pool power market with stochastic price models from financial economics. The idea is to combine the fundamental relationships (given by the system dynamics model) with a good representation of stochasticity from stochastic price models. The purpose is to provide long-term price prognoses for investment decisions as an alternative to the current approach of using scenarios for long-term prices generated by fundamental, partial equilibrium models. Our paper describes a case study at Agder Energi, a Norwegian utility operating in the Nord Pool market.