Market Makers and Liquidity Premium in Electricity Futures Markets

Juan Ignacio Peña and Rosa Rodríguez

The Energy Journal, 2022, vol. Volume 43, issue Number 2

Abstract: This paper studies the forward premium as a liquidity premium in electricity futures markets as determined by producers and retailers' demand for immediacy. Demand for immediacy by a buyer (seller) means the willingness to buy (sell) at the current market price rather than wait until a better price appears. An imbalance between the supply and demand of futures contracts creates a demand for immediacy. Market makers satisfy this demand by offsetting the imbalance at the current market price and require a liquidity premium until the imbalance disappears. The liquidity premium is negative (positive) when market makers sell (buy) futures contracts. The empirical application to the French, German, Spanish, and Nordic futures electricity markets in 2008-2017, finds several periods with a negative liquidity premium in the first three markets, suggesting that retailers wanted to offload a higher amount of price risk than the producers. The premium decreases when the number of market makers increases.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2022
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