Long-term relationships between electricity and oil, gas and coal future prices-evidence from Nordic countries, Continental Europe and the United Kingdom

This paper investigates the relationship between futures prices of electricity, on the one hand and crude oil, natural gas and coal on the other hand, in the United Kingdom, German and Nordic energy markets. Energy traders and market participants use statistical models in their trading activities. W...

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Bibliographic Details
Published in:OPEC energy review 2014-06, Vol.38 (2), p.216-242
Main Authors: Frydenberg, Stein, Onochie, Joseph I., Westgaard, Sjur, Midtsund, Nora, Ueland, Hanna
Format: Article
Language:English
Subjects:
Applied sciences
Coal
Crude oil
Crude oil prices
Economic data
Electric energy
Electric power
Electric rates
Electricity
Electricity pricing
Energy
Energy consumption
Energy economics
Energy industry
Energy market
Energy policy
Energy prices
Europe
Exact sciences and technology
Fossil fuels and derived products
Futures
Gas
General, economic and professional studies
Germans
Germany
Markets
Mathematical models
Natural gas
Oil
Petroleum
Petroleum industry
Power generation
Prices
Reversing
Reversion
Selling
Spreads
Statistical analysis
Statistical models
Strategy
Studies
Traders
United Kingdom
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Summary:This paper investigates the relationship between futures prices of electricity, on the one hand and crude oil, natural gas and coal on the other hand, in the United Kingdom, German and Nordic energy markets. Energy traders and market participants use statistical models in their trading activities. We seek to establish robust cointegration based models as decision tools for energy commodity spread trading. We look at three different markets with different input mixtures, for electricity generation. Using daily futures data from period 2006 to 2012, we find cointegration between UK electricity prices and Coal and Gas, and between Nordic electricity prices and Coal. The spread between German electricity prices and Gas, Oil and Coal prices are also stationary. The consequence of this finding could be a possible trading strategy which involves buying electricity futures and selling gas or coal when the spread is above the mean and reversing the strategy when the spread is below the mean. The suggested strategy assumes a reversion to the mean, which we show takes some time, as displayed by the slow speed of adjustment.
ISSN:1753-0229
1753-0237
DOI:10.1111/opec.12025