Mailing address: The Hugo Steinhaus Center Wrocław University of Technology Wybrzeże Wyspiańskiego 27 50-370 Wrocław, Poland (+48-71) 320-3530 (+48-71) 320-2654 hugo@im.pwr.wroc.pl Research Report HSC/05/2 Heavy tails and electricity prices Rafał Weron 1 1 Hugo Steinhaus Center for Stochastic Methods, Institute of Mathematics and Computer Science, Wrocław University of Technology, 50-370 Wrocław, Poland Abstract: In the first years after the emergence of deregulated power markets it be- came apparent that for the valuation of electricity derivatives we cannot simply rely on models developed for financial or other commodity markets. However, before adequate models can be put forward the unique characteristics of electricity (spot) prices have to be thoroughly analyzed. In particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of returns. In this paper we first ana- lyze the stylized facts of electricity prices, then present two modeling approaches: jump-diffusion and regime-switching, which to some extent address the pertinent is- sues.