Electricity Futures Prices: Indirect Storability, Expectations, and Risk Premiums
Ronald Huisman and
Energy Economics, 2012, vol. 34, issue 4, 892-898
The goal of this paper is to examine to what extent electricity futures prices contain expected risk premiums or have power to forecast spot prices and whether this might be dependent on the type of electricity supply. We analyse futures prices from the Dutch market, a market in which power is produced with storable fossil fuels, and futures prices from the NordPool market, where electricity is mostly produced by hydropower. We show that futures prices from markets in which electricity is predominantly produced by imperfectly storable fuels such as hydro, wind and solar contain information about expected changes in the spot price of electricity, whereas futures prices from markets in which electricity is predominantly produced with perfectly storable fuels contain information about both expected price changes and time-varying risk premiums. These findings provide insight in the applicability of forward price models; one cannot apply the same model to all electricity markets. Forward models for markets with imperfect indirect storability should depend heavily on price expectations and models should include time-varying risk premiums for markets with perfect indirect storability.
Keywords: Electricity futures prices; Risk premiums; Indirect storability (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:34:y:2012:i:4:p:892-898
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