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Determinants of the Forward Premium in the Nord Pool Electricity Market

Author

Listed:
  • Erik Haugom

    (Inland School of Business and Social Sciences, Inland Norway University of Applied Sciences, 2624 Lillehammer, Norway)

  • Peter Molnár

    (UiS Business School, University of Stavanger, 4036 Stavanger, Norway
    Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, 7491 Trondheim, Norway
    Department of Finance and Accounting, University of Economics, 13067 Prague, Czech Republic
    Faculty of Economics Sciences and Management, Nicolaus Copernicus University in Toruń, 87-100 Toruń, Poland)

  • Magne Tysdahl

    (Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, 7491 Trondheim, Norway)

Abstract

Nord Pool is the leading power market in Europe. It has been documented that the forward contracts traded in this market exhibit a significant forward premium, which could be a sign of market inefficiency. Efficient power markets are important, especially when there is a goal to increase the share of the power mix stemming from renewable energy sources. We therefore contribute to the understanding of this topic by examining how the forward premium in the Nord Pool market depend on several economic and physical conditions. We utilise two methods: ordinary least squares and quantile regression. The results show that the reservoir level and the basis (the difference between the forward and spot price) have a significant impact on the forward premium. The realised volatility of futures prices and the implied volatility of the stock market have strong effects on both the conditional lower and upper tails of the forward premium. We also find that, as the market has matured, the forward premium has decreased, indicating an increase in market efficiency.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jeners:v:13:y:2020:i:5:p:1111-:d:327348
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    References listed on IDEAS

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