Risk Transfer in an Electricity Market

David Esteban Rodriguez, Alfredo Trespalacios () and David Galeano
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David Esteban Rodriguez: Department of Finance, Instituto Tecnológico Metropolitano, Medellín 0500131, Colombia
David Galeano: Instituto de Física, Universidad de Antioquia, Antioquia 050021, Colombia

Mathematics, 2021, vol. 9, issue 21, 1-12

Abstract: Energy is traded using different products; long-term contracts or electricity forward contracts can assure the future transaction price. However, due to the difficulties in storing electrical energy for long periods and in large amounts, risks must be incorporated when defining contract prices through a Forward Risk Premia (FRP). This study analyzes the transfer of uncertainty from electricity market variables to the FRP in long-term contracts. We evaluate a type of econometric risk with the construction of Autoregressive Distributed Lag contagion models for the FRP using electricity demand, spot price, power generation via different technologies, and the Oceanic Niño Index. As a case study, we consider the Colombian electricity market. Our results show empirical models where the FRP has a short-term response with the following variables: hydropower generation, coal power generation, electricity demand, and Oceanic Niño Index, even though its transaction is reflected one or two years after the occurrence of the event.

Keywords: electricity market; Forward Risk Premia (FRP); contagion model; ARIMAX (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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