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Storage and the electricity forward premium

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  • Douglas, Stratford
  • Popova, Julia

Abstract

We develop and test a model describing the influence of natural gas storage inventories on the electricity forward premium. The model is constructed by linking the effect of gas storage constraints on the higher moments of the distribution of electricity prices to an established model of the effect of those moments on the forward premium. The model predicts a sharply negative effect of gas storage inventories on the electricity forward premium when demand for electricity is high and space-heating demand for gas is low. Empirical results, based on PJM data, strongly support the model.

Suggested Citation

  • Douglas, Stratford & Popova, Julia, 2008. "Storage and the electricity forward premium," Energy Economics, Elsevier, vol. 30(4), pages 1712-1727, July.
    • Handle: RePEc:eee:eneeco:v:30:y:2008:i:4:p:1712-1727
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    References listed on IDEAS

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    1. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
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    3. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    4. Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000. "Equilibrium Forward Curves for Commodities," Journal of Finance, American Finance Association, vol. 55(3), pages 1297-1338, June.
    5. Francis A. Longstaff & Ashley W. Wang, 2004. "Electricity Forward Prices: A High-Frequency Empirical Analysis," Journal of Finance, American Finance Association, vol. 59(4), pages 1877-1900, August.
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