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European Electricity and interrelated Futures Markets: A cointegrated Vector Autoregressive Analysis

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  • Andreas Fritz

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    (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

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    Abstract

    This study investigates the price formation of electricity futures at the European Energy Exchange (EEX) and aims at understanding the price formation in connection with interrelated futures markets such as ARA coal at the Intercontinental Exchange (ICE), natural gas at the Title Transfer Exchange (TTF) and CO2 allowances. Results obtained from using a vector error correction model suggest that price formation in the futures markets for electricity can be explained to some extent fundamentally. Electricity futures price dynamics show dependency on marginal generation costs. A stable longâ€term equilibrium between electricity futures prices and marginal costs, namely prices of hard coal, natural gas and CO2 allowances could be found. An impulse response analysis reveals that in the longer run the electricity futures price converge to marginal costs of a hard coal power plant. This is useful information for electric utilities and regulatory bodies since futures markets serve several purposes for energy utilities, including price discovery, hedging, valuation and trading.

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    File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1205_EuropeanElectricityAndInterrelatedFuturesMarketsACointegratedVectorAutoregressiveAnalysis.pdf
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    Bibliographic Info

    Paper provided by University of Duisburg-Essen, Chair for Management Science and Energy Economics in its series EWL Working Papers with number 1205.

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    Date of creation: Aug 2012
    Date of revision: Aug 2012
    Handle: RePEc:dui:wpaper:1205

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    Related research

    Keywords: Energy; Cointegration; Electricity Market; Futures Market;

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    1. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
    2. Dempster, M.A.H. & Medova, Elena & Tang, Ke, 2008. "Long term spread option valuation and hedging," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2530-2540, December.
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