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Short-term electricity futures prices: Evidence on the time-varying risk premium

Author

Listed:
  • Hipòlit Torró

    (Universitat de València)

  • Julio Lucia

    (Universitat de València)

Abstract

This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange, Nord Pool. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the Nord Pool market around the end of year 2002, the variation of the risk premiums was related to the variance and the skewness of future spot prices. This result is consistent with the view that risk considerations played a role in the determination of futures prices. Finally, additional evidence provided throughout the paper supports the view that circumstances changed in the Nord Pool market after the shock period. Este trabajo estudia la relación entre los precios de contado y a futuro de la electricidad a través de un análisis empírico realizado sobre los precios a futuro a corto plazo negociados durante una década en el mercado nórdico de electricidad, Nord Pool. Los resultados indican que existen primas de riesgo positivas en media en los contratos de futuro a corto plazo. Sin embargo, la significatividad y tamaño de las primas varia estacionalmente a lo largo del año, siendo las de mayor tamaño durante el invierno y nulas durante el verano. También se encuentra evidencia significativa relativa a la capacidad explicativa de los niveles anormalmente bajos de las reservas hidráulicas sobre la variación temporal de las primas de riesgo. Además, antes del shock de oferta que azotó el mercado Nord Pool a finales del año 2002, la variación de las primas de riesgo estaba relacionada con la varianza y asimetría de los precios futuros de la electricidad. Este resultado es coherente con la visión de que el riesgo se tomaba en consideración en la determinación de los precios a futuro. Finalmente, a lo largo de todo el documento se muestra evidencia adicional a favor de la opinión de que las cirscustancias cambiaron en el Nord Pool después del periodo turbulento.

Suggested Citation

  • Hipòlit Torró & Julio Lucia, 2008. "Short-term electricity futures prices: Evidence on the time-varying risk premium," Working Papers. Serie EC 2008-08, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasec:2008-08
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    References listed on IDEAS

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    Cited by:

    1. van Koten, Silvester, 2021. "The forward premium in electricity markets: An experimental study," Energy Economics, Elsevier, vol. 94(C).
    2. Andrés Mirantes & Javier Población & Gregorio Serna, 2015. "Commodity derivative valuation under a factor model with time-varying market prices of risk," Review of Derivatives Research, Springer, vol. 18(1), pages 75-93, April.
    3. Mehtap Kilic & Ronald Huisman, 2010. "Is Power Production Flexibility a Substitute for Storability? Evidence from Electricity Futures Prices," Tinbergen Institute Discussion Papers 10-070/2, Tinbergen Institute.
    4. Huisman, Ronald & Kilic, Mehtap, 2012. "Electricity Futures Prices: Indirect Storability, Expectations, and Risk Premiums," Energy Economics, Elsevier, vol. 34(4), pages 892-898.
    5. 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).
    6. Michal Michalovský & Igor Paholok, 2011. "Portfolio Theory and Electricity Forward Markets," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2011(1), pages 76-103.
    7. Viehmann, Johannes, 2011. "Risk premiums in the German day-ahead Electricity Market," Energy Policy, Elsevier, vol. 39(1), pages 386-394, January.
    8. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.
    9. Bunn, Derek W. & Chen, Dipeng, 2013. "The forward premium in electricity futures," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 173-186.
    10. Joanna Janczura, 2014. "Pricing electricity derivatives within a Markov regime-switching model: a risk premium approach," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 79(1), pages 1-30, February.
    11. Torro, Hipolit, 2009. "Assessing the influence of spot price predictability on electricity futures hedging," MPRA Paper 18892, University Library of Munich, Germany.
    12. Furió, Dolores & Meneu, Vicente, 2010. "Expectations and forward risk premium in the Spanish deregulated power market," Energy Policy, Elsevier, vol. 38(2), pages 784-793, February.
    13. 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.
    14. 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.
    15. Yumi Oum & Shmuel S. Oren, 2010. "Optimal Static Hedging of Volumetric Risk in a Competitive Wholesale Electricity Market," Decision Analysis, INFORMS, vol. 7(1), pages 107-122, March.
    16. 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).

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    More about this item

    Keywords

    Prima de riesgo; futuros sobre la electricidad; Nord Pool risk premium; electricity futures; Nord Pool;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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