Abstract
The functional relationship linking spot and forward power prices has been long debated. In this chapter, we rely on a modified interpretation of the storage theory and draw on an approximation of residual generation capacity in the German power system to model the difference between future and spot prices (price basis) registered at the European Energy Exchange (EEX). We accommodate various econometric specifications to three years of daily data time series. Statistical significance is achieved in all cases. Best results are obtained with an exponential GARCH estimation. Restated residual capacity is able to accurately drive the observed basis. This provides some evidence of the increasing rationality of power markets and their dependence on production and distribution constraints.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Bessembinder, H. and M. L. Lemmon (2002) ‘Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets’, Journal of Finance, vol. 57, no. 2.
Borestein, S. (2001) ‘The Trouble with Electricity Markets (and Some Solutions)’, Program on Workable Energy Regulation Working Paper.
Botterud, A., A. Bhattacharyya and I. Marija (2003) ‘Futures and Spot Prices — An Analysis of the Scandinavian Electricity Market’, Norwegian Research Council Working Paper.
Brennan, M. (1991) ‘The Price of Convenience and the Pricing of Commodity Contingent Claims’, in D. Lund and B. Oksendal (eds), Stochastic Models and Option Values (New York: Elsevier).
Bresnahan, T. and P. Spiller (1986) ‘Futures Market Backwardation under Risk Neutrality’, Economic Inquiry, vol. 24 (July).
Copeland, T. and F. Weston (1992) Financial Theory and Corporate Policy (Reading, MA: Addison-Wesley).
Deaton, A. and G. Laroque (1992) ‘Commodity Prices’, Review of Economic Studies, vol. 59, no. 1.
Escribano, A., J. Pena and P. Villapland (2002) ‘Modeling Electricity Prices: International Evidence’, Universidad Carlos III de Madrid Working Paper.
Fama, E. and K. R. French (1987) ‘Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage’, Journal of Business, vol. 60, no. 1.
Fama, E. and K. R. French (1988) ‘Business Cycles and the Behavior of Metal Prices’, Journal of Finance, vol. 43, no. 5.
Gjolberg, O. and T. Johnsen (2001) ‘Electricity Futures: Inventories and Price Relationships at Nord Pool’, Discussion Paper.
Greene, W. (2003) Econometric Analysis (Englewood Cliffs, NJ: Prentice-Hall).
Hull, J. (1993) Options, Futures, and Other Derivative Securities (Englewood Cliffs, NJ: Prentice-Hall).
Kaldor, D. (1939) ‘Speculation and Economic Stability’, Review of Economic Studies, 7.
McKinlay, C. and K. Ramaswamy (1988) ‘Index-Futures Arbitrages and the Behavior of Stock Index Futures Prices’, Review of Financial Studies, vol. 1, no. 2.
Mork, E. (2004) ‘The Dynamics of Risk Premiums in Nord Pool’s Futures Market’, 24th USAEE/IAEE North American Conference Proceedings.
Ng, V. and C. Pinong (1994) ‘Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metal Prices’, Journal of Business, vol. 67, no. 2.
Pindyck, R. S. (1994) ‘Inventories and the Short-Run Dynamics of Commodity Prices’, Rand Journal of Economics, vol. 25, no. 1.
Pinong, C. (2001) ‘The Price of Power: The Valuation of Power and Weather Derivatives’, Oklahoma State University Working Paper.
Routledge, B., D. Seppi and C. Spatt (2000) ‘Equilibrium Forward Curves for Commodities’, Journal of Finance, vol. 55, no. 3.
Woo, C., I. Horowitz and K. Hoang (2001) ‘Cross Hedging and Forward-Contract Pricing of Electricity’, Energy Economics, vol. 23.
Working, H. (1948) ‘Theory of the Inverse Carrying Charge in Futures Markets’, Journal of Farm Economics, vol. 30.
Working, H. (1949) ‘The Theory of the Price of Storage’, American Economic Review, vol. 39.
Editor information
Editors and Affiliations
Copyright information
© 2007 Carlo Pozzi
About this chapter
Cite this chapter
Pozzi, C. (2007). The Relationship between Spot and Forward Prices in Electricity Markets. In: Keppler, J.H., Bourbonnais, R., Girod, J. (eds) The Econometrics of Energy Systems. Palgrave Macmillan, London. https://doi.org/10.1057/9780230626317_9
Download citation
DOI: https://doi.org/10.1057/9780230626317_9
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-54149-2
Online ISBN: 978-0-230-62631-7
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)