Expectations and forward risk premium in the Spanish deregulated power market

Deregulation in energy markets has entailed important changes in the way agents conduct business. Price risk arises as a result of fluctuations in the future price of electricity and agents assume long or short positions in the forward and spot markets to hedge their exposure to price risk. The pres...

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Bibliographic Details
Published in:Energy policy 2010-02, Vol.38 (2), p.784-793
Main Authors: Furió, Dolores, Meneu, Vicente
Format: Article
Language:English
Subjects:
Agency
Agents’ behavior
Carbon emissions
Deregulation
Deregulation Agents' behavior Forward premium
Electric rates
Electricity
Energy industry
Energy market
Energy prices
Expectation
Forward premium
Prices
Pricing policies
Risk
Risk premiums
Spain
Studies
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Summary:Deregulation in energy markets has entailed important changes in the way agents conduct business. Price risk arises as a result of fluctuations in the future price of electricity and agents assume long or short positions in the forward and spot markets to hedge their exposure to price risk. The presence of forward risk premium in prices is evidence of the fact that agents act in the market according to risk considerations. This work aims to analyse the information content of the difference between the forward and spot prices (the so-called forward premium) regarding the agents’ decisions. We find that the sign and magnitude of the ex post forward premium depend on the unexpected variation in demand and on the unexpected variation in the hydroelectric capacity, and that both the ex post and the ex ante forward premia are negatively related to the variance of spot price, as Bessembinder and Lemmon (2002) predict. We provide additional insights about relevant aspects of spot price pricing in the Spanish electricity market such as the positive relation between spot prices and CO 2 emission allowance prices or the impact on spot prices of the set of market matching rules introduced in March 2006.
ISSN:0301-4215
1873-6777
DOI:10.1016/j.enpol.2009.10.023