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How Big Is the Risk Premium in an Electricity Forward Price? Evidence from the Pacific Northwest

Author

Listed:
  • DeBenedictis, Andrew
  • Miller, David
  • Moore, Jack
  • Olson, Arne
  • Woo, C.K.

Abstract

The numerous benefits of electricity forward trading come at a cost to consumers when a forward price contains a risk premium. An analysis based on the theory of cross hedging suggests that there is a risk premium of about 5 percent in the forward price for delivery at the Mid-Columbia hub of the Pacific Northwest. The existence of a relatively large risk premium suggests that forward contract buyers are more risk-averse than sellers.

Suggested Citation

  • DeBenedictis, Andrew & Miller, David & Moore, Jack & Olson, Arne & Woo, C.K., 2011. "How Big Is the Risk Premium in an Electricity Forward Price? Evidence from the Pacific Northwest," The Electricity Journal, Elsevier, vol. 24(3), pages 72-76, April.
    • Handle: RePEc:eee:jelect:v:24:y:2011:i:3:p:72-76
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    Cited by:

    1. Jesús M. López-Lezama & David Tobón-Orozco & Esteban Velilla & Jorge Barrientos & Fernando Villada, 2018. "Long-term seasonal forwards in electricity generation markets: an application to Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 37(74), pages 287-314, July.
    2. Chi-Keung Woo & Jay Zarnikau & Asher Tishler & Kang Hua Cao, 2022. "Insuring a Small Retail Electric Provider’s Procurement Cost Risk in Texas," Energies, MDPI, vol. 16(1), pages 1-12, December.
    3. Lin, Jiang & Kahrl, Fredrich & Yuan, Jiahai & Liu, Xu & Zhang, Weirong, 2019. "Challenges and strategies for electricity market transition in China," Energy Policy, Elsevier, vol. 133(C).

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