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Storage and the Electricity Forward Premium

  • Julia Popova

    (West Virginia University Department of Economics)

  • Stratford Douglas

    (West Virginia University Department of Economics)

We develop and test a model describing the influence of natural gas storage on the electricity forward premium. The model is constructed by linking the effect of gas storage on the higher moments of the distribution of electricity prices to an established model of the effect of those moments on the forward premium. The model predicts a (weakly) positive effect of gas storage on the electricity forward premium when loads are light, but a sharply negative effect when demand for electricity is high and demand for gas is low. The model predicts a daily pattern of stronger effects in the afternoon. Empirical results, based on PJM data, strongly support the model.

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File URL: http://www.be.wvu.edu/phd_economics/pdf/06-16.pdf
File Function: First version, 2006
Download Restriction: no

Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 06-16 Classification-.

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Length: 21 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wvu:wpaper:06-16
Contact details of provider: Postal: P.O. Box 6025, Morgantown, WV 26506-6025
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Web page: http://www.be.wvu.edu/phd_economics/
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  1. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-50, Carnegie Mellon University, Tepper School of Business.
  2. 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, 06.
  3. 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, 08.
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