Determinants of the Forward Premium in the Nord Pool Electricity Market

Erik Haugom, Peter Molnár and Magne Tysdahl
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Erik Haugom: Inland School of Business and Social Sciences, Inland Norway University of Applied Sciences, 2624 Lillehammer, Norway
Magne Tysdahl: Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, 7491 Trondheim, Norway

Energies, 2020, vol. 13, issue 5, 1-18

Abstract: Nord Pool is the leading power market in Europe. It has been documented that the forward contracts traded in this market exhibit a significant forward premium, which could be a sign of market inefficiency. Efficient power markets are important, especially when there is a goal to increase the share of the power mix stemming from renewable energy sources. We therefore contribute to the understanding of this topic by examining how the forward premium in the Nord Pool market depend on several economic and physical conditions. We utilise two methods: ordinary least squares and quantile regression. The results show that the reservoir level and the basis (the difference between the forward and spot price) have a significant impact on the forward premium. The realised volatility of futures prices and the implied volatility of the stock market have strong effects on both the conditional lower and upper tails of the forward premium. We also find that, as the market has matured, the forward premium has decreased, indicating an increase in market efficiency.

Keywords: electricity; futures; forward premium; quantile regression (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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