IDEAS home Printed from https://ideas.repec.org/a/eee/jebusi/v117y2021ics0148619521000370.html
   My bibliography  Save this article

The electricity production cost curve during extreme winter weather

Author

Listed:
  • Michelfelder, Richard A.
  • Pilotte, Eugene A.

Abstract

This investigation analyzes the characteristics of the largest US wholesale electricity market’s production cost curve and supply curve during the most extreme winter weather event in modern meteorological history. The experience of this event demonstrates that the annual-summer-peak-centric nature of the Northeast US’ PJM capacity planning process does not address the adequacy of supply during the winter. The production cost curve is estimated and compared across recent winter season peak months to understand how large the price responsiveness to load changes can be during extreme winter weather events and how winter weather events can reduce system reliability for a summer-capacity-planning-centric power market. Therefore, PJM and other power pool markets have not considered secondary peak seasons in capacity planning. The shape of the production cost curve discussed herein is a critical component of the structural model and determinant of spot and forward market electricity prices.

Suggested Citation

  • Michelfelder, Richard A. & Pilotte, Eugene A., 2021. "The electricity production cost curve during extreme winter weather," Journal of Economics and Business, Elsevier, vol. 117(C).
    • Handle: RePEc:eee:jebusi:v:117:y:2021:i:c:s0148619521000370
    DOI: 10.1016/j.jeconbus.2021.106019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148619521000370
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeconbus.2021.106019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Viehmann, Johannes, 2011. "Risk premiums in the German day-ahead Electricity Market," Energy Policy, Elsevier, vol. 39(1), pages 386-394, January.
    2. Cartea, Álvaro & Villaplana, Pablo, 2008. "Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2502-2519, December.
    3. Pirrong, Craig & Jermakyan, Martin, 2008. "The price of power: The valuation of power and weather derivatives," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2520-2529, December.
    4. 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, June.
    5. Melissa Dell & Benjamin F. Jones & Benjamin A. Olken, 2014. "What Do We Learn from the Weather? The New Climate-Economy Literature," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 740-798, September.
    6. Yuewen Xiao & David B. Colwell & Ramaprasad Bhar, 2015. "Risk Premium in Electricity Prices: Evidence from the PJM Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(8), pages 776-793, August.
    7. Wang, Yi & Yang, Zhifang & Yu, Juan & Fang, Xinxin, 2020. "Revisit the electricity price formulation: A formal definition, proofs, and examples," Energy, Elsevier, vol. 200(C).
    8. Douglas, Stratford & Popova, Julia, 2008. "Storage and the electricity forward premium," Energy Economics, Elsevier, vol. 30(4), pages 1712-1727, July.
    9. Fanone, Enzo & Gamba, Andrea & Prokopczuk, Marcel, 2013. "The case of negative day-ahead electricity prices," Energy Economics, Elsevier, vol. 35(C), pages 22-34.
    10. 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.
    11. Kolos, Sergey P. & Ronn, Ehud I., 2008. "Estimating the commodity market price of risk for energy prices," Energy Economics, Elsevier, vol. 30(2), pages 621-641, March.
    12. Mosquera-López, Stephanía & Uribe, Jorge M. & Manotas-Duque, Diego Fernando, 2017. "Nonlinear empirical pricing in electricity markets using fundamental weather factors," Energy, Elsevier, vol. 139(C), pages 594-605.
    13. Francis A. Longstaff & Ashley W. Wang, 2004. "Electricity Forward Prices: A High-Frequency Empirical Analysis," Journal of Finance, American Finance Association, vol. 59(4), pages 1877-1900, August.
    14. Valitov, Niyaz, 2019. "Risk premia in the German day-ahead electricity market revisited: The impact of negative prices," Energy Economics, Elsevier, vol. 82(C), pages 70-77.
    15. Paraschiv, Florentina & Erni, David & Pietsch, Ralf, 2014. "The impact of renewable energies on EEX day-ahead electricity prices," Energy Policy, Elsevier, vol. 73(C), pages 196-210.
    16. Lucia, Julio J. & Torró, Hipòlit, 2011. "On the risk premium in Nordic electricity futures prices," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 750-763, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Algieri, Bernardina & Leccadito, Arturo & Tunaru, Diana, 2021. "Risk premia in electricity derivatives markets," Energy Economics, Elsevier, vol. 100(C).
    2. 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).
    3. Koten, Silvester Van, 2020. "Forward premia in electricity markets: A replication study," Energy Economics, Elsevier, vol. 89(C).
    4. van Koten, Silvester, 2021. "The forward premium in electricity markets: An experimental study," Energy Economics, Elsevier, vol. 94(C).
    5. Weron, Rafał & Zator, Michał, 2014. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 44(C), pages 178-190.
    6. Bevin-McCrimmon, Fergus & Diaz-Rainey, Ivan & McCarten, Matthew & Sise, Greg, 2018. "Liquidity and risk premia in electricity futures," Energy Economics, Elsevier, vol. 75(C), pages 503-517.
    7. Erik Haugom & Peter Molnár & Magne Tysdahl, 2020. "Determinants of the Forward Premium in the Nord Pool Electricity Market," Energies, MDPI, vol. 13(5), pages 1-18, March.
    8. 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).
    9. Benth, Fred Espen & Biegler-König, Richard & Kiesel, Rüdiger, 2013. "An empirical study of the information premium on electricity markets," Energy Economics, Elsevier, vol. 36(C), pages 55-77.
    10. Bonaldo, Cinzia & Caporin, Massimiliano & Fontini, Fulvio, 2022. "The relationship between day-ahead and future prices in electricity markets: An empirical analysis on Italy, France, Germany, and Switzerland," Energy Economics, Elsevier, vol. 110(C).
    11. 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).
    12. Bunn, Derek W. & Chen, Dipeng, 2013. "The forward premium in electricity futures," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 173-186.
    13. Jacobs, Kris & Li, Yu & Pirrong, Craig, 2022. "Supply, demand, and risk premiums in electricity markets," Journal of Banking & Finance, Elsevier, vol. 135(C).
    14. Zhang, Yue & Farnoosh, Arash, 2019. "Analyzing the dynamic impact of electricity futures on revenue and risk of renewable energy in China," Energy Policy, Elsevier, vol. 132(C), pages 678-690.
    15. Rubin, Ofir D. & Babcock, Bruce A., 2011. "A novel approach for modeling deregulated electricity markets," Energy Policy, Elsevier, vol. 39(5), pages 2711-2721, May.
    16. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.
    17. Huisman, Ronald & Kilic, Mehtap, 2012. "Electricity Futures Prices: Indirect Storability, Expectations, and Risk Premiums," Energy Economics, Elsevier, vol. 34(4), pages 892-898.
    18. Estevão, João & Raposo, Clara, 2018. "The impact of the 2030 Climate and Energy Framework Agreement on electricity prices in MIBEL: A mixed-methods approach," Journal of Business Research, Elsevier, vol. 89(C), pages 411-417.
    19. Størdal, Ståle & Ewald, Christian-Oliver & Lien, Gudbrand & Haugom, Erik, 2023. "Trading time seasonality in electricity futures," Journal of Commodity Markets, Elsevier, vol. 31(C).
    20. Andreas Wagner, 2014. "Residual Demand Modeling and Application to Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).

    More about this item

    Keywords

    PJM; Electricity markets; Extreme weather; Electricity production cost curve; Polar vortex;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:117:y:2021:i:c:s0148619521000370. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-economics-and-business .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.