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The relationship between spot and futures prices in the Nord Pool electricity market

  • Botterud, Audun
  • Kristiansen, Tarjei
  • Ilic, Marija D.
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    We analyze 11 years of historical spot- and futures prices from the hydro-dominated Nord Pool electricity market. We find that futures prices tend to be higher than spot prices. The average convenience yield is therefore negative, but varies by season and depends on the storage levels in hydro reservoirs. The average realized return on holding a long position in the futures market is also negative. The negative convenience yield and risk premium contrast empirical findings in most other commodity markets. We argue that differences between the supply and demand sides in terms of risk preferences and the ability to take advantage of short-term price variations can contribute to explain the observed relationship between spot- and futures prices. In addition, our analysis shows that the relationship between spot and futures prices is clearly linked to the physical state of the system, such as hydro inflow, reservoir levels, and demand.

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    File URL: http://www.sciencedirect.com/science/article/B6V7G-4XV06WD-1/2/1c5f478478db09c6b09889a602697365
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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 5 (September)
    Pages: 967-978

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:5:p:967-978
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    1. Redl, Christian & Haas, Reinhard & Huber, Claus & Böhm, Bernhard, 2009. "Price formation in electricity forward markets and the relevance of systematic forecast errors," Energy Economics, Elsevier, vol. 31(3), pages 356-364, May.
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    7. Julia Popova & Stratford Douglas, 2006. "Storage and the Electricity Forward Premium," Working Papers 06-16 Classification-, Department of Economics, West Virginia University.
    8. Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
    9. Chiou Wei, Song Zan & Zhu, Zhen, 2006. "Commodity convenience yield and risk premium determination: The case of the U.S. natural gas market," Energy Economics, Elsevier, vol. 28(4), pages 523-534, July.
    10. 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.
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    14. Fell, Harrison, 2008. "EU-ETS and Nordic Electricity: A CVAR Approach," Discussion Papers dp-08-31, Resources For the Future.
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