Cartea González, Álvaro IvánVillaplana Conde, Pablo2011-09-222011-09-222008-12Journal of Banking & Finance, 2008, v. 32, n. 12, pp. 2502-25190378-4266https://hdl.handle.net/10016/12157We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premiumapplication/pdfeng©ElsevierPower pricesDemandCapacityForward premiumForward biasMarket price of capacity riskMarket price of demand riskPJMEngland and WalesNord poolSpot price modeling and the valuation of electricity forward contracts : the role of demand and capacityresearch articleC5G00G12G13Q4Q41Empresa10.1016/j.jbankfin.2008.04.006 open access2502122519Journal of Banking & Finance32