Modeling long-term electricity forward prices

Martin Povh and Stein-Erik Fleten

MPRA Paper from University Library of Munich, Germany

Abstract: In contrast to forwards and futures on storable commodities, prices of long-term electricity forwards exhibit a dynamics different to that of short-term and mid-term prices. We model long-term electricity forward prices through demand and supply for electricity, adjusted with a risk premium. Long-term prices of electricity, oil, coal, natural gas, emission allowance, imported electricity and aluminum are modeled with a vector autoregressive model. To estimate the model we use weekly prices of far-maturity forwards relevant for Nordic electricity market. Electricity prices experienced few substantial shocks during the period analyzed, however, we found no evidence of a structural break. Cointegration analysis indicates two stationary cointegrating vectors. Nord Pool price is found significant in the short- and the long-run model, while the gas price is insignificant in both. Other variables are significant only in the long-run model. The model shows some influence of the risk premium, however not on the long-term electricity forwards at Nord Pool.

Keywords: Electricity prices; long-term forward prices; VAR modeling; cointegration (search for similar items in EconPapers)
JEL-codes: C01 G13 Q4 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13162

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