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Risk Premia in Electricity Forward Prices

Author

Listed:
  • Diko Pavel

    () (Electrabel S.A.)

  • Lawford Steve

    () (Electrabel S.A.)

  • Limpens Valerie

    () (Electrabel S.A.)

Abstract

We investigate the presence of significant electricity forward risk premia, using data from three major continental European energy markets - German, Dutch and French. We introduce the risk premium in the framework of a standard electricity spot/forward unobserved factor model, and derive the implied forward price behaviour. We then assess the term-structure and time-evolution of the risk premia for each of the markets.

Suggested Citation

  • Diko Pavel & Lawford Steve & Limpens Valerie, 2006. "Risk Premia in Electricity Forward Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 1-24, September.
  • Handle: RePEc:bpj:sndecm:v:10:y:2006:i:3:n:7
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    References listed on IDEAS

    as
    1. Alvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor & Francis Journals, pages 313-335.
    2. 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 923-973, July.
    3. Fred Espen Benth & Lars Ekeland & Ragnar Hauge & BjøRn Fredrik Nielsen, 2003. "A note on arbitrage-free pricing of forward contracts in energy markets," Applied Mathematical Finance, Taylor & Francis Journals, pages 325-336.
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    Cited by:

    1. Michel Culot & Valérie Goffin & Steve Lawford & Sébastien De Meten & Yves Smeers, 2013. "Practical stochastic modelling of electricity prices," Post-Print hal-01021603, HAL.
    2. Abadie, Luis M. & Chamorro, José M., 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, Elsevier, pages 10-22.
    3. Pietz, Matthäus, 2009. "Risk premia in electricity wholesale spot markets: empirical evidence from Germany," CEFS Working Paper Series 2009-11, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    4. Botterud, Audun & Kristiansen, Tarjei & Ilic, Marija D., 2010. "The relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, pages 967-978.
    5. Aziz Chouikh & Abdelwahed Trabelsi, 2014. "Modeling Risk Premia in Forward Foreign Exchange Rates as Unobserved Components: The Model Identification Problem," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(3), pages 119-135, July.
    6. Abadie, Luis M. & Chamorro, José M., 2008. "Valuing flexibility: The case of an Integrated Gasification Combined Cycle power plant," Energy Economics, Elsevier, vol. 30(4), pages 1850-1881, July.
    7. Povh, Martin & Fleten, Stein-Erik, 2009. "Modeling long-term electricity forward prices," MPRA Paper 13162, University Library of Munich, Germany.
    8. Marius Paschen, 2016. "The effect of intermittent renewable supply on the forward premium in German electricity markets," Working Papers V-397-16, University of Oldenburg, Department of Economics, revised Nov 2016.
    9. George Daskalakis, Lazaros Symeonidis, Raphael N. Markellos, 2015. "Electricity futures prices in an emissions constrained economy: Evidence from European power markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    10. Benth, Fred Espen & Biegler-König, Richard & Kiesel, Rüdiger, 2013. "An empirical study of the information premium on electricity markets," Energy Economics, Elsevier, pages 55-77.
    11. María Dolores Furió & Vicente Meneu, 2009. "Expectations and Forward Risk Premium in the Spanish Power Market," Working Papers. Serie AD 2009-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    12. Robert Flasza & Milan Rippel & Jan Šolc, 2011. "Modelling Long-Term Electricity Contracts at EEX," Working Papers IES 2011/08, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2011.
    13. Pietz, Matthäus, 2009. "Risk premia in the German electricity futures market," CEFS Working Paper Series 2009-07, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    14. Weron, Rafał & Zator, Michał, 2014. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, pages 178-190.
    15. 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.
    16. Stefan Trück & Rafal Weron, 2015. "Convenience yields and risk premiums in the EU-ETS - Evidence from the Kyoto commitment period," HSC Research Reports HSC/15/03, Hugo Steinhaus Center, Wroclaw University of Technology.
    17. Joanna Janczura & Rafał Weron, 2012. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," AStA Advances in Statistical Analysis, Springer;German Statistical Society, pages 385-407.
    18. Weron, Rafal, 2008. "Market price of risk implied by Asian-style electricity options and futures," Energy Economics, Elsevier, pages 1098-1115.
    19. Marckhoff, Jan & Wimschulte, Jens, 2009. "Locational price spreads and the pricing of contracts for difference: Evidence from the Nordic market," Energy Economics, Elsevier, pages 257-268.
    20. Chevallier, Julien, 2010. "Modelling risk premia in CO2 allowances spot and futures prices," Economic Modelling, Elsevier, vol. 27(3), pages 717-729, May.
    21. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, pages 90-111.
    22. Carlos Pinho & Mara Madaleno, 2011. "Links between spot and futures allowances: ECX and EEX markets comparison," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 35(2/3/4), pages 101-131.
    23. Stefan Trück & Rafał Weron, 2016. "Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(6), pages 587-611, June.
    24. Daskalakis, George & Markellos, Raphael N., 2009. "Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, Nord Pool and Powernext," Energy Policy, Elsevier, vol. 37(7), pages 2594-2604, July.

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