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Electricity futures prices: time varying sensitivity to fundamentals

Author

Listed:
  • Stein-Erik Fleten

    (Norwegian University of Science and Technology)

  • Ronald Huisman

    (Erasmus School of Economics and IEB)

  • Mehtap Kilic

    (Erasmus School of Economics)

  • Enrico Pennings

    (Erasmus School of Economics)

  • Sjur Westgaard

    (Norwegian University of Science and Technology)

Abstract

This paper provides insight in the time-varying relation between electricity futures prices and fundamentals in the form of prices of contracts for fossil fuels. As supply curves are not constant and different producers have different marginal costs of production, we argue that the relation between electricity futures prices and futures prices of underlying fundamentals such as natural gas, coal and emission rights are not constant and vary over time. We test this view by applying a model that linearly relates electricity futures prices to the marginal costs of production and calculate the log-likelihood of different time-varying and constant specifications of the coefficients. To do so, we formulate the model in state-space form and apply the Kalman Filter to observe the dynamics of the coefficients. We analyse historical prices of futures contracts with different delivery periods (calendar year and seasons, peak and off-peak) from Germany and the U.K. The results indicate that analysts should choose a time-varying specification to relate the futures price of power to prices of underlying fundamentals.

Suggested Citation

  • Stein-Erik Fleten & Ronald Huisman & Mehtap Kilic & Enrico Pennings & Sjur Westgaard, 2014. "Electricity futures prices: time varying sensitivity to fundamentals," Working Papers 2014/21, Institut d'Economia de Barcelona (IEB).
    • Handle: RePEc:ieb:wpaper:doc2014-21
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Electricity futures prices; prices of fossil fuels; time-varying coefficients; statespace model;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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