Dealing with Electricity Prices
The 1990s witnessed the start of a worldwide deregulation process in the electricity industry. Since then, electricity prices have been based on the market rules of supply and demand. The non-storability of electricity, absence of substitutes, inelastic supply and patterns in electricity consumption, make that power prices are subject to mean-reversion, seasonality and frequent price jumps. These stylized facts are not as extreme as those observed in any other commodity- or financial market. The reforms have triggered the demand for electricity derivatives, and have led to the introduction of market places where electricity can be traded on spot or forward. These markets enable market players to allocate the price risk that they are exposed to, by selecting portfolios consisting of spot- and derivative contracts in accordance with their risk appetite. Although academic research on valuation of derivatives and portfolio theory is well-established, little is known about its applicability in electricity markets due to the aforementioned unique characteristics. The scientific contribution of this research is to extend the empirical methodology by conducting tests for untested hypotheses and propose alternative methodologies for (spot- and derivative) price modelling and portfolio management. We do so by using time-series analysis, extreme value theory, panel data models and portfolio theory. Data is obtained from the most active electricity exchanges in the world. We hereby provide answers to yet unresolved issues on market efficiency, spot price dynamics, forward risk premia dynamics and structuring of the sourcing portfolio.
|Keywords||Electricity markets, balancing prices, day-ahead prices, derivative prices, extreme value theory, liberalization, panel models, portfolio theory, price modeling, time-series analysis|
|Publisher||Erasmus Research Institute of Management (ERIM)|
|Sponsor||C.G. Koedijk , D.W. Bunn , E. van Heck , Erasmus University Rotterdam (EUR) , R. Huisman , R. Mahieu , Rotterdam School of Management (RSM)|
Huurman, C.. (2007, March 22). Dealing with Electricity Prices. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/9399