An Analysis of the Main Determinants of Electricity Forward Prices and Forward Risk Premia

29 Pages Posted: 7 Sep 2012

See all articles by Álvaro Cartea

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Pablo Villaplana

Comisión Nacional de Energía

Date Written: September 6, 2012

Abstract

The liberalisation of energy markets entails the appearance of market risks which must be borne by market participants: producers, retailers, and final consumers. Some of these risks can be managed by participating in the forward markets and transferring it to other agents who are willing to bear it and command a compensation for it. Thus, forward prices are made up of two components: the expected spot price at a future date and the forward risk premium. In this chapter we analyse the factors influencing the evolution of electricity forward prices in Spain. These factors include the forward prices for natural gas and CO2 emission rights, as well as the electricity forward prices in Germany and in France and spot prices in Spain. We also analyse the behavior of the ex-post electricity forward risk premia in Germany, France and Spain, and in particular we find a positive correlation between ex-post electricity risk premia in these three countries as well as between risk premia for electricity and natural gas futures prices.

Keywords: Electricity forward premia, forward risk premium, electricity prices

JEL Classification: C5, G00, G12, G13, Q4, Q41

Suggested Citation

Cartea, Álvaro and Villaplana, Pablo, An Analysis of the Main Determinants of Electricity Forward Prices and Forward Risk Premia (September 6, 2012). Available at SSRN: https://ssrn.com/abstract=2142590 or http://dx.doi.org/10.2139/ssrn.2142590

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Pablo Villaplana

Comisión Nacional de Energía ( email )

Alcalá, 47
Madrid, Madrid 28014
Spain

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