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Renewable Energy and Equilibrium Hedging in Electricity Forward Markets

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  • Sebastian Schwenen
  • Karsten Neuhoff

Abstract

We study the impact of renewable energy on forward markets for electricity. Previous literature shows that forward prices are determined by time-varying demand and volatile spot prices. We introduce supply risk from renewable generation and find that stochastic renewable output mitigates income risk for generating firms, in particular when negative shocks to renewable output have large positive price impact. This risk off-setting effect leads to reduced hedging needs for generating companies and increases the forward premium. Using five years of high-frequency spot and futures market data, we confirm our model empirically. In sum, our findings suggest that intermittent renewable generation changes firm’s hedging incentives and has significant impact on forward prices for electricity. JEL Classification: G11, G13, Q42

Suggested Citation

  • Sebastian Schwenen & Karsten Neuhoff, 2024. "Renewable Energy and Equilibrium Hedging in Electricity Forward Markets," The Energy Journal, , vol. 45(5), pages 105-123, September.
    • Handle: RePEc:sae:enejou:v:45:y:2024:i:5:p:105-123
    DOI: 10.1177/01956574241241878
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    References listed on IDEAS

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    1. Frank A. Wolak, 2007. "Quantifying the supply-side benefits from forward contracting in wholesale electricity markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1179-1209.
    2. Neuhoff, Karsten & Wolter, Sophia & Schwenen, Sebastian, 2016. "Power markets with Renewables: New perspectives for the European Target Model," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 37, pages 3-38.
    3. Koichiro Ito & Mar Reguant, 2016. "Sequential Markets, Market Power, and Arbitrage," American Economic Review, American Economic Association, vol. 106(7), pages 1921-1957, July.
    4. Richard Green & Nicholas Vasilakos, 2012. "Storing Wind for a Rainy Day: What Kind of Electricity Does Denmark Export?," The Energy Journal, , vol. 33(3), pages 1-22, July.
    5. Karsten Neuhoff & Sophia Wolter & Sebastian Schwenen, 2016. "Power Markets with Renewables: New Perspectives for the European Target Model," The Energy Journal, , vol. 37(2_suppl), pages 23-38, June.
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    More about this item

    Keywords

    risk mitigation; forward markets; electricity; renewable energy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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