How Big Is the Risk Premium in an Electricity Forward Price? Evidence from the Pacific Northwest

The numerous benefits of electricity forward trading come at a cost to consumers when a forward price contains a risk premium. An analysis based on the theory of cross hedging suggests that there is a risk premium of about 5 percent in the forward price for delivery at the Mid-Columbia hub of the Pa...

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Bibliographic Details
Published in:The Electricity journal 2011-04, Vol.24 (3), p.72-76
Main Authors: DeBenedictis, Andrew, Miller, David, Moore, Jack, Olson, Arne, Woo, C.K.
Format: Article
Language:English
Subjects:
Benefits
Consumers
Contracts
Cost
Electric power
Energy policy
Hedging
Northwestern states
Prices
Risk
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Summary:The numerous benefits of electricity forward trading come at a cost to consumers when a forward price contains a risk premium. An analysis based on the theory of cross hedging suggests that there is a risk premium of about 5 percent in the forward price for delivery at the Mid-Columbia hub of the Pacific Northwest. The existence of a relatively large risk premium suggests that forward contract buyers are more risk-averse than sellers.
ISSN:1040-6190
1873-6874
DOI:10.1016/j.tej.2011.02.011