RT Generic
T1 Spot price modeling and the valuation of electricity forward contracts : the role of demand and capacity
A1 Cartea González, Álvaro Iván
A1 Villaplana Conde, Pablo
AB We propose a model where wholesale electricity prices are explained bytwo state variables: demand and capacity. We derive analytical expressions toprice forward contracts and to calculate the forward premium. We apply ourmodel to the PJM, England and Wales, and Nord Pool markets. Our empiricalfindings indicate that volatility of demand is seasonal and that the market priceof demand risk is also seasonal and positive, both of which exert an upward(seasonal) pressure on the price of forward contracts. We assume that bothvolatility of capacity and the market price of capacity risk are constant andfind that, depending on the market and period under study, it could eitherexert an upward or downward pressure on forward prices. In all markets wefind that the forward premium exhibits a seasonal pattern. During the monthsof high volatility of demand, forward contracts trade at a premium. Duringmonths of low volatility of demand, forwards can either trade at a relativelysmall premium or, even in some cases, at a discount, i.e. they exhibit a negativeforward premium
YR 2007
FD 2007-12-16
LK https://hdl.handle.net/10016/12082
UL https://hdl.handle.net/10016/12082
LA eng
DS e-Archivo
RD 28 may. 2024