Information in Electricity Forward Prices

Richard A. Michelfelder and Eugene A. Pilotte

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 8, 2641-2664

Abstract: We examine forward prices in a market where nonstorable inventory exacerbates the influence of seasonal and hourly variation in supply and demand, expected and unexpected, on the level and volatility of spot prices. We find strong evidence, unusual for a commodity, that the difference between contemporaneous forward and spot prices has power to forecast both the spot price change and the risk premium realized at delivery. Our evidence of a time-varying risk premium is consistent with expected hourly and seasonal variation in the needs of producers and retailers of electricity to hedge against extreme spot price decreases and increases, respectively.

Date: 2020
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