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Market Power in Power Markets: Evidence from Forward Prices of Electricity

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  • Bent Jesper Christensen
  • Thomas Elgaard Jensen
  • Rune Mølgaard

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Abstract

We examine the forward market for electricity for indications of misuse of market power. The data source is a unique set of OTC price indications posted by Elsam A/S, the dominant producer in Western Denmark, which is one of the price areas under the Nordic power exchange Nord Pool. The Danish Competition Council (the regulatory government agency) has ruled that Elsam used its dominant position to obtain excessive spot prices over the period July 2003 through December 2006. We show that significant forward premia exist during this period, and that they are related both to spot market volatility and misuse of market power in the spot market, indicating that misuse of market power in the forward market accompanied that which took place in the spot market, according to the regulator?s ruling. This is consistent with the hypothesis that Elsam used the forward market to disguise its spot market manipulation. The findings are consistent across forward premium regressions and structural forward pricing models.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-30.

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Length: 68
Date of creation: 26 Oct 2007
Date of revision:
Handle: RePEc:aah:create:2007-30

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Web page: http://www.econ.au.dk/afn/

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Keywords: Electricity; forward prices; market power; OTC prices;

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References

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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, 06.
  2. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-49, Carnegie Mellon University, Tepper School of Business.
  3. Haldrup, Niels & Nielsen, Morten Orregaard, 2006. "A regime switching long memory model for electricity prices," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 349-376.
  4. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
  5. Chester Spatt & Bryan Routledge & Duane Seppi, 1998. "The Spark Spread: An equilibrium model of the Cross-Commodity Price Relationships in Electricity," GSIA Working Papers 1999-15, Carnegie Mellon University, Tepper School of Business.
  6. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
  7. 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.
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Cited by:
  1. 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.
  2. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.
  3. Jónsson, Tryggvi & Pinson, Pierre & Madsen, Henrik, 2010. "On the market impact of wind energy forecasts," Energy Economics, Elsevier, vol. 32(2), pages 313-320, March.

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