Modeling long-term electricity forward prices

Povh, Martin and Fleten, Stein-Erik (2009): Modeling long-term electricity forward prices.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Electricity prices; long-term forward prices; VAR modeling; cointegration
• Subjects: G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

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