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Modeling long-term electricity forward prices

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  • Povh, Martin
  • Fleten, Stein-Erik

Abstract

In contrast to forwards and futures on storable commodities, prices of long-term electricity forwards exhibit a dynamics different to that of short-term and mid-term prices. We model long-term electricity forward prices through demand and supply for electricity, adjusted with a risk premium. Long-term prices of electricity, oil, coal, natural gas, emission allowance, imported electricity and aluminum are modeled with a vector autoregressive model. To estimate the model we use weekly prices of far-maturity forwards relevant for Nordic electricity market. Electricity prices experienced few substantial shocks during the period analyzed, however, we found no evidence of a structural break. Cointegration analysis indicates two stationary cointegrating vectors. Nord Pool price is found significant in the short- and the long-run model, while the gas price is insignificant in both. Other variables are significant only in the long-run model. The model shows some influence of the risk premium, however not on the long-term electricity forwards at Nord Pool.

Suggested Citation

  • Povh, Martin & Fleten, Stein-Erik, 2009. "Modeling long-term electricity forward prices," MPRA Paper 13162, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13162
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    References listed on IDEAS

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    1. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    2. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
    5. Diko Pavel & Lawford Steve & Limpens Valerie, 2006. "Risk Premia in Electricity Forward Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 1-24, September.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Cited by:

    1. 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).
    2. 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).
    3. Pedro Leal & Rui Castro & Fernando Lopes, 2023. "Influence of Increasing Renewable Power Penetration on the Long-Term Iberian Electricity Market Prices," Energies, MDPI, vol. 16(3), pages 1-19, January.

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    More about this item

    Keywords

    Electricity prices; long-term forward prices; VAR modeling; cointegration;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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