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The Electricity Market, Day-Ahead Market and Futures Market

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Financial Aspects in Energy

Abstract

This chapter firstly provides an overview of the day-ahead and futures electricity markets of APX-ENDEX that is one of Europe’s most experienced energy exchanges, operating spot and futures markets for electricity and natural gas in the Netherlands, the United Kingdom and Belgium. An empirical analysis on the relationship between spot and futures electricity market of APX-ENDEX is then covered. We handle the most liquid year, which is 2008, of traded electricity futures contracts and we find that the market is in normal backwardation. Our regression analysis extents the Fama (J Monet Econ 1984;14:319–338) regressions and rejects the efficiency hypothesis. Our results indicate that the futures prices are not unbiased predictors of the future spot prices. Remarkably, the difference between the spot and futures prices is associated with the risk premium and the change in spot prices, supports the arbitrage and speculation opportunities in the market.

The authors are grateful to Mr. M. Rijke, director of Energy Data Company, Mr. D. Jong, Belgian Power Exchange (BELPEX), and Mrs. E. Sarr, European Power Exchange, EPEXspot for their advice and support for the data. We are also thankful for the detailed comments of Mr. M. Nijpels, Product Manager of APX BV, Amsterdam and Mr. P. Pottuijt, Senior Energy Consultant in the Dutch and Central Western European (CWE) energy market.

APX-ENDEX refers Amsterdam Power Exchange – European Energy Derivatives Exchange.

APX-ENDEX refers Amsterdam Power Exchange – European Energy Derivatives Exchange.

In September 2010, NYSE Euronext, the biggest operator of U.S. stock exchanges, formed a joint venture with APX Inc. to expand its trading volume in electricity, renewable energy and carbon dioxide allowances. The name of the new company is NYSE Blue.

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Notes

  1. 1.

    The concept is now planned to include Germany, Luxembourg and Norway. In addition, APX-ENDEX is also developing on the BritNed electricity cable, linking the Netherlands and the United Kingdom and will start to operate in 2011. This linkage proven to be successful will bring new liquidity to the UK electricity market.

  2. 2.

    The detailed discussion about the risk premium models is presented in Sect. 7.3.

  3. 3.

    See, Moosa and Al-Loughani (1995) and Crowder and Hamed (1993) for weak form market efficiency tests and speculation or arbitrage possibilities in commodity futures.

  4. 4.

    The information and tables in Sect. 2.2.1 are obtained from the following website of APX-ENDEX: http://www.apxendex.com/

  5. 5.

    In lots of 0.1 MW means, in pieces of 0.1 MW. In this vein: 0.1, 02 MW, etc.

  6. 6.

    The Electricity Act stipulates that all connected parties must arrange their own programme responsibility (PV). The System Code states that they can assign this responsibility to any legal entity recognized by TenneT and for so far they are recognized as program responsible party. 

  7. 7.

    For a proof of the cost-of-carry model using an arbitrage argument, see Hull (1993, Chap. 3).

  8. 8.

    Crowder and Hamed (1993) tests the arbitrage equilibruim in the crude oil market with cointegration analysis because of the nonstationary data. According to their analyses, spot rates, futures rates and risk free market rate should cointegrate if the riskless arbitrage opportunities are not possible. The expected return could only equal to the risk free rate if there is no arbitrage. But they did not support the arbitrage efficiency hypothesis.

Abbreviations

APX:

ENDEX Amsterdam Power Exchange – European Energy Derivatives Exchange

BE:

Belgium

CFD:

Contracts for difference

EEX:

European Energy Exchange

EU:

European Union

GMT:

Greenwich mean time

KW:

Kilowatt

MW:

Megawatt

MWh:

Megawatt hour

NL:

Netherlands

NYMEX:

New York Mercantile Exchange

OTC:

Over the counter

PV Program:

Responsibility (Dutch: Programma verantwoordelijkheid)

TenneT:

The Dutch transmission system operator

TSO:

Transmission system operator

UK:

United Kingdom

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Authors and Affiliations

  1. Department of Business Administration, Hacettepe University, Ankara, Turkey

    Goknur Umutlu

  2. VU University Amsterdam, Amsterdam, The Netherlands

    André Dorsman

  3. Department of Economics, Hacettepe University, 06800, Ankara, Turkey

    Erdinc Telatar

Authors
  1. Goknur Umutlu
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  2. André Dorsman
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  3. Erdinc Telatar
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Corresponding author

Correspondence to Goknur Umutlu .

Editor information

Editors and Affiliations

  1. , Finance, VU University Amsterdam, De Boelelaan 1105, Amsterdam, 1081 HV, Netherlands

    André Dorsman

  2. , Economics, Econometrics and Finance, University of Groningen, Nettelbosje 2, Groningen, 9747 AE, Groningen, Netherlands

    Wim Westerman

  3. , Business Administration, Hacettepe University, Beytepe Campus, Ankara, 06800, Turkey

    Mehmet Baha Karan

  4. , Business Administration, Hacettepe University, Beytepe Campus, Ankara, 06800, Turkey

    Özgür Arslan

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Umutlu, G., Dorsman, A., Telatar, E. (2011). The Electricity Market, Day-Ahead Market and Futures Market. In: Dorsman, A., Westerman, W., Karan, M., Arslan, Ö. (eds) Financial Aspects in Energy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-19709-3_7

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  • DOI: https://doi.org/10.1007/978-3-642-19709-3_7

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