Risk Premiums in the German Day-Ahead Electricity Market

This paper conducts an empirical analysis of risk premiums in the German day-ahead Electricity Wholesale Market. We compare hourly price data of the European Energy Exchange (EEX) auction and of the continuous over-the-counter (OTC) market taking place prior to EEX. As OTC price data are not publicly available, data provided by the Energy Exchange Austria (EXAA) have been used as a snapshot of the OTC market. It has been found that market participants are willing to pay both, positive and negative premiums for hourly contracts that are significantly different from zero. The largest positive premiums were paid for evening peak hours on weekdays during winter months, the period of time with the highest electricity consumption levels of the year. By contrast, night hours on weekends featuring lowest demand levels display negative premiums. Hence, findings by Longstaff and Wang (2004) can be supported that power traders in liberalised markets behave like riskaverse rational economic agents.Electricity trading; Risk premium; EEX

Market Monitor: Development of the Wholesale Electricity Market in 2006

Competition in the Dutch electricity market is stagnating. The market remains concentrated, with relatively high prices. The north-west European market must be further integrated by expanding the available interconnection capacity in order to achieve a structural improvement. That could cut consumers’ annual energy bills by several dozen euros per household. Consumers would also benefit indirectly since electricity prices for business would also fall, putting downward pressure on prices of other products. In order to achieve these benefits for consumers, the TSO’s must make headway with the expansion of the available interconnection capacity.Monitoring, electricity, competition, infrastructure

First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany

This paper applies the literature on asymmetric price transmission to the emerging commodity market for EU emissions allowances (EUA). We utilize an error correction model and an autoregressive distributed lag model to measure the relationship between CO2 price changes and the development of wholesale electricity prices. Using data from the German market for electricity and EUAs, we find that the rising prices of EUAs have a stronger impact on wholesale electricity prices than falling prices -- the first empirical evidence of asymmetric cost passthrough for these new allowances.

Legitimacy building for the European Energy Exchange

"This paper analyzes the strategies to build legitimacy for the European Energy Exchange in Leipzig (short: EEX) which became the central trading place for electricity in Germany in 2002. Following Suchman's differentiation in the three phases of gaining, maintaining and repairing legitimacy, it focuses on the phase of gaining legitimacy. The arguments in this article are predominately based on neoinstitutional sociology. They are part of a larger project on the forms, functions and consequences of price building at the EEX." (author's abstract

Bringing in Liquidity and Transparency when the Power Sector is Consolidated: The Duty to Trade on the Power Exchange

The present model analyses how the state would provide services when the change of power depends upon the performance of the state. Agents can evaluate state performance based either only on the receipt of government services, or both on the benefit from government services and taxes imposed. With a credible threat of power change, if the valuation of the government services is low, along with a low fiscal capacity, then it is less probable that this service would be provided. Furthermore, such an allocation is compared with a situation, when there exists a threat of active opposition. Interestingly, that threat does not change the optimum provisioning of government services (as compared to the previous situation) in the equilibrium

Analysis of the efficiency of the Iberian power futures market.

Market efficiency is analysed for the Iberian Power Futures Market and other European Power Markets, as well as other fuel markets through evaluation of ex-post Forward Risk Premium. The equilibrium price from compulsory call auctions for distribution companies within the framework of the Iberian Power Futures Market is not optimal for remuneration purposes as it seems to be slightly upward biased. In the period considered (August 2006–July 2008), monthly futures contracts behave similarly to quarterly contracts. Average risk premia have been positive in power and natural gas markets but negative in oil and coal markets. Different hypotheses are tested regarding increasing volatility with maturity and regarding Forward Risk Premium variations (decreasing with variance of spot prices during delivery period and increasing with skewness of spot prices during delivery period). Enlarged data sets are recommended for stronger test results. Energy markets tend to show limited levels of market efficiency. Regarding the emerging Iberian Power Futures Market, price efficiency is improved with market development of all the coexistent forward contracting mechanisms and with further integration of European Regional Electricity Markets

The Application of Anti-Manipulation Law to EU Wholesale Energy Markets and Its Interplay with EU Competition Law

The Application of Anti-Manipulation Law to EU Wholesale Energy Markets and Its Interplay with EU Competition Law Of the findings, the European Commission established in its report on Energy Sector Inquiry, market manipulation constituted a major concern for the functioning and integrity of EU energy sectors. The Commission argued that the responsibility for high prices in wholesale energy markets could be attributed to manipulative practices of energy incumbents and the trust in the operation of operation of sector was largely compromised, due to these practices. Remedies, EU competition law provided, were considered as insufficient to resolve these shortcomings and thus should be supplemented with regulatory-based tools. The findings of the Energy Sector Inquiry and subsequent consultation documents by multiple EU institutions paved the way for the adoption of the Regulation on wholesale energy market integrity and transparency, REMIT, which incorporated into an anti-manipulation rule, specifically designed to prohibit and prosecute manipulative practices in EU wholesale energy markets. Nevertheless, as EU case law on market manipulation has yet to develop and there are uncertainties with respect to the concept of market manipulation. Furthermore REMIT does not preclude the jurisdiction of EU competition law, questions arise as to the scope and the extent of the application of this prohibition. Throughout its chapters, this book explores the scope of and the case law on market manipulation to determine what types of market practices are regarded as manipulative and thus prohibited under anti-manipulation rules. It also focuses on the interplay between REMIT and EU competition law and evaluates factors and circumstances that determine when and what market misconduct can be subject to enforcement proceedings under both anti-manipulation and antitrust rules. As the development of a single, coherent, rulebook that can be relied upon by market participant is fundamental for the functioning of EU wholesale energy markets, the book, finally, provides proposals and measures that can mitigate and resolve the legal uncertainties regarding the regulatory framework REMIT established

Comparison of Long-Term Contracts and Vertical Integration in Decentralised Electricity Markets

Decentralised electricity systems require effective price and quantity risk management mechanisms but the nature of such systems poses particular problems for satisfying those requirements. Among these problems are investment hold-up risks rooted in the competition facing both electricity retailers and large industrial firms. Additional problems include those of load profile information and bargaining mismatches between generators and customers. Significantly hold-up risks exist not only between retailers and generators but also affect (e.g. fuel) suppliers upstream of generators. Contracts are one means of addressing such problems and represent a particular improvement on spot market trading alone. However we argue that market contracting in electricity systems is a costly approach to addressing hold-up and related problems and that internal organisation (i.e. vertical integration) is a more efficient alternative minimising the overall costs of market contracting and ownership. Not only does integration internalise wholesale market risks and market power costs to the integrated firm thereby reducing their importance it also reduces the need for and efficacy of regulation to constrain generator market power. It furthermore thins contract markets reducing the threat of generator hold-up from competitive retail entry and otherwise supports generation investment and hence supply security. While the reinstatement or retention of retail franchise areas is one possible solution to the problems of contracting it is arguably unnecessary if there are other system features (such as transmission constraints) impeding retail entry. This is particularly so in systems involving vertical integration although even then policy makers are confronted with a trade-off between promoting retail competition and facilitating generation investment and supply security requiring judgement as to the optimal degree of retail market power. While vertical integration is a more natural and self-sustaining solution to electricity sector problems it too is only a partial solution leaving complementary roles for spot and long-term contract markets

Forecasting realized volatility in Nord Pool electricity market

Electricity markets, like other commodity markets, offer many opportunities for their participants, but their high volatility and the unstorable nature of electricity makes them quite different. Due to the high volatility, volatility forecasting would be even more useful in the electricity markets, but as they produce high frequency data, the traditional models for forecasting volatility often perform poorly. Realized volatility has emerged as one possible solution for this problem. This study tests the possibility to use the realized volatility of daily spot prices in the Nord Pool electricity market to form forecasts about the next day’s realized volatility and the behavior of the daily and hourly spot prices during the next day. The Nord Pool electricity market is chosen due to its uniqueness among the European electricity markets, and due to the lack of existing studies about this area. The Nord Pool markets also strongly experience the effects of seasonality and the weather, which could affect the effectiveness of volatility forecasting. The hourly electricity spot price data used in this study is collected directly from Nord Pool. Realized volatility and the heterogeneous autoregressive model of realized volatility, the HAR-RV model, have proven to be successful forecasting tools, even when using high frequency data. The HAR-RV model has been shown to be far more effective and accurate in high-frequency markets than the previously traditional volatility forecasting models. Realized volatility by itself makes it easier to view intraday prices, and it can be used to view the historical data inside the high-frequency data. To test the forecasting power of realized volatility in the Nord Pool electricity markets, the effectiveness of the HAR-RV model is tested with OLS regression. The results of this model are then compared to the actual data, which is inspected more closely to find out possible patterns in the behavior of realized volatility and the hourly electricity prices. The results show that the HAR-RV model is able to accurately forecast the next day’s realized volatility, and these results can then be used to form predictions about the behavior of the next day’s electricity prices. As the model can be used to forecast over longer time periods as well, this gives ground for further study to be made from this area