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Forward risk premia in long-term transmission rights: The case of electricity price area differentials (EPAD) in the Nordic electricity market

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  • Spodniak, Petr
  • Collan, Mikael

Abstract

Hedging behaviour among players in derivatives markets have long been explained by forward risk premia. We provide new empirical evidence from the Nordic electricity market and explore the forward risk premia dynamics on power derivative contracts called electricity price area differentials (EPAD). This contract is critical for the market, but its efficiency has been questioned. The study investigates the significance, direction, and magnitude of forward risk premia in individual bidding areas and contract maturities during the period 2001–2013. We test the hypothesis of a negative relationship between forward risk premia and time-to-maturity, for which we find only partial support.

Suggested Citation

  • Spodniak, Petr & Collan, Mikael, 2018. "Forward risk premia in long-term transmission rights: The case of electricity price area differentials (EPAD) in the Nordic electricity market," Utilities Policy, Elsevier, vol. 50(C), pages 194-206.
  • Handle: RePEc:eee:juipol:v:50:y:2018:i:c:p:194-206
    DOI: 10.1016/j.jup.2018.01.004
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    Cited by:

    1. Junttila, Juha & Myllymäki, Valtteri & Raatikainen, Juhani, 2018. "Pricing of electricity futures based on locational price differences: The case of Finland," Energy Economics, Elsevier, vol. 71(C), pages 222-237.

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    Keywords

    Forward risk premia; Time-to-maturity; Hedging;

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