Price forecasting using wavelet transform and LSE based mixed model in Australian electricity market

Purpose – Price forecasting is essential for risk management in deregulated electricity markets. The purpose of this paper is to propose a hybrid technique using wavelet transform (WT) and multiple linear regression (MLR) to forecast price profile in electricity markets. Design/methodology/approach – Price series is highly volatile and non-stationary in nature. In this work, initially complete price series has been decomposed into separate 48 half-hourly series and then these series have been categorized into different segments for price forecasting. For some segments, WT based MLR has been applied and for the other segments, simple MLR model has been applied. The model is general in nature and has been implemented for one day-ahead price forecasting in National Electricity Market (NEM) of Australia. Participants can use the technique practically, since it predicts price well before submission of bids. Findings – Forecasting performance of the proposed WT and MLR based mixed model has been compared with the three other models, an analytical model, a MLR model and an artificial neural network (ANN) based model. The proposed model was found to be better. Performance evaluation for different wavelets was performed, and it has been observed that for improving forecasting accuracy using WT, Daubechies wavelet of order two gives the best performance. Originality/value – Forecasting accuracy improvement of an established technique by incorporating time domain and wavelet domain variables of the same time series into one set has been implemented in this work. The paper also attempts to explain how non-stationarity can be removed from a non-stationary time series by applying WT after appropriate statistical investigation. Moreover, real time electricity markets are highly unpredictable and yet under investigated. The model has been applied to NEM for the same reason.