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Electricity Futures Prices: Indirect Storability, Expectations, and Risk Premiums

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  • Huisman, Ronald
  • Kilic, Mehtap
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    Abstract

    The goal of this paper is to examine to what extent electricity futures prices contain expected risk premiums or have power to forecast spot prices and whether this might be dependent on the type of electricity supply. We analyse futures prices from the Dutch market, a market in which power is produced with storable fossil fuels, and futures prices from the NordPool market, where electricity is mostly produced by hydropower. We show that futures prices from markets in which electricity is predominantly produced by imperfectly storable fuels such as hydro, wind and solar contain information about expected changes in the spot price of electricity, whereas futures prices from markets in which electricity is predominantly produced with perfectly storable fuels contain information about both expected price changes and time-varying risk premiums. These findings provide insight in the applicability of forward price models; one cannot apply the same model to all electricity markets. Forward models for markets with imperfect indirect storability should depend heavily on price expectations and models should include time-varying risk premiums for markets with perfect indirect storability.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 4 ()
    Pages: 892-898

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    Handle: RePEc:eee:eneeco:v:34:y:2012:i:4:p:892-898

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Electricity futures prices; Risk premiums; Indirect storability;

    References

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    1. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
    2. Fred Espen Benth & Alvaro Cartea & Ruediger Kiesel, 2006. "Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium," Birkbeck Working Papers in Economics and Finance 0611, Birkbeck, Department of Economics, Mathematics & Statistics.
    3. Hipòlit Torró & Julio Lucia, 2008. "Short-term electricity futures prices: Evidence on the time-varying risk premium," Working Papers. Serie EC 2008-08, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Wimschulte, Jens, 2010. "The futures and forward price differential in the Nordic electricity market," Energy Policy, Elsevier, vol. 38(8), pages 4731-4733, August.
    5. Alvaro Cartea & Pablo Villaplana Conde, 2007. "Spot Price Modeling and the Valuation of Electricity Forward Contracts: the Role of Demand and Capacity," Birkbeck Working Papers in Economics and Finance 0718, Birkbeck, Department of Economics, Mathematics & Statistics.
    6. 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, 08.
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    9. Douglas, Stratford & Popova, Julia, 2008. "Storage and the electricity forward premium," Energy Economics, Elsevier, vol. 30(4), pages 1712-1727, July.
    10. Weron, Rafal, 2008. "Market price of risk implied by Asian-style electricity options and futures," Energy Economics, Elsevier, vol. 30(3), pages 1098-1115, May.
    11. Kolos, Sergey P. & Ronn, Ehud I., 2008. "Estimating the commodity market price of risk for energy prices," Energy Economics, Elsevier, vol. 30(2), pages 621-641, March.
    12. 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, 06.
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    Cited by:
    1. Jakub Nowotarski & Jakub Tomczyk & Rafal Weron, 2012. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," HSC Research Reports HSC/12/06, Hugo Steinhaus Center, Wroclaw University of Technology.
    2. Jaeck, Edouard & Lautier, Delphine, 2014. "Samuelson hypothesis and electricity derivative markets," Economics Papers from University Paris Dauphine 123456789/13630, Paris Dauphine University.
    3. Rafal Weron & Michal Zator, 2013. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," HSC Research Reports HSC/13/08, Hugo Steinhaus Center, Wroclaw University of Technology.
    4. Olsen, Eirik Tandberg & Sanda, Gaute Egeland & Fleten, Stein-Erik, 2010. "Selective Hedging in Hydro-Based Electricity Companies," MPRA Paper 47820, University Library of Munich, Germany, revised 25 Jun 2013.
    5. Florian Ziel & Rick Steinert, 2014. "Efficient Modeling and Forecasting of the Electricity Spot Price," Papers 1402.7027, arXiv.org.

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