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The Relationship between Spot and Forward Prices in Electricity Markets

In: The Econometrics of Energy Systems

Author

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  • Carlo Pozzi

Abstract

The functional relationship linking spot and forward power prices has been long debated. In this chapter, we rely on a modified interpretation of the storage theory and draw on an approximation of residual generation capacity in the German power system to model the difference between future and spot prices (price basis) registered at the European Energy Exchange (EEX). We accommodate various econometric specifications to three years of daily data time series. Statistical significance is achieved in all cases. Best results are obtained with an exponential GARCH estimation. Restated residual capacity is able to accurately drive the observed basis. This provides some evidence of the increasing rationality of power markets and their dependence on production and distribution constraints.

Suggested Citation

  • Carlo Pozzi, 2007. "The Relationship between Spot and Forward Prices in Electricity Markets," Palgrave Macmillan Books, in: Jan Horst Keppler & Régis Bourbonnais & Jacques Girod (ed.), The Econometrics of Energy Systems, chapter 9, pages 186-206, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-62631-7_9
    DOI: 10.1057/9780230626317_9
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