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Analyzing Risk Premiums in the Brazilian Power Market: A Quantitative Study

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  • Tarjei Kristiansen

    (Independent Researcher, 8000 Aarhus C, Denmark)

Abstract

This paper conducts an empirical analysis of risk premiums in the Brazilian electricity market, a critical but understudied field. Employing two distinct methodologies—Average Forward Prices and Last Observed Forward Prices—the study calculates risk premiums between spot and forward electricity prices. Our analysis consistently identifies negative risk premiums, which serve as indicators that the market may be underestimating certain types of risk. These underestimations are potentially influenced by inherent market uncertainties, including volatile demand, unpredictable supply, and frequent regulatory shifts. Additionally, we observe a high volatility in risk premiums, signifying a dynamic and ever-changing market where expectations are continuously recalibrated. Such conditions present possible arbitrage opportunities for market actors and underline the need for policymakers to introduce measures mitigating market unpredictability. By focusing on these nuances, this paper enriches the broader discourse on risk premiums in electricity markets and underscores the necessity for further research aimed at devising effective risk management strategies.

Suggested Citation

  • Tarjei Kristiansen, 2023. "Analyzing Risk Premiums in the Brazilian Power Market: A Quantitative Study," Commodities, MDPI, vol. 2(4), pages 1-16, November.
    • Handle: RePEc:gam:jcommo:v:2:y:2023:i:4:p:22-397:d:1272468
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    References listed on IDEAS

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    1. Botterud, Audun & Kristiansen, Tarjei & Ilic, Marija D., 2010. "The relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 32(5), pages 967-978, September.
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    3. Fleten, Stein-Erik & Hagen, Liv Aune & Nygård, Maria Tandberg & Smith-Sivertsen, Ragnhild & Sollie, Johan M., 2015. "The overnight risk premium in electricity forward contracts," Energy Economics, Elsevier, vol. 49(C), pages 293-300.
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    6. Erik Haugom & Guttorm A. Hoff & Peter Molnár & Maria Mortensen & Sjur Westgaard, 2018. "The Forward Premium in the Nord Pool Power Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(8), pages 1793-1807, June.
    7. Joanna Janczura, 2012. "Pricing electricity derivatives within a Markov regime-switching model," Papers 1203.5442, arXiv.org.
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