Storage and the electricity forward premium
We develop and test a model describing the influence of natural gas storage inventories on the electricity forward premium. The model is constructed by linking the effect of gas storage constraints on the higher moments of the distribution of electricity prices to an established model of the effect of those moments on the forward premium. The model predicts a sharply negative effect of gas storage inventories on the electricity forward premium when demand for electricity is high and space-heating demand for gas is low. Empirical results, based on PJM data, strongly support the model.
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