Modeling long-term electricity forward prices

In contrast to forwards and futures on storable commodities, prices of long-term electricity forwards exhibit a dynamics different to that of short-term and mid-term prices. We model long-term electricity forward prices through demand and supply for electricity, adjusted with a risk premium. Long-term prices of electricity, oil, coal, natural gas, emission allowance, imported electricity and aluminum are modeled with a vector autoregressive model. To estimate the model we use weekly prices of far-maturity forwards relevant for Nordic electricity market. Electricity prices experienced few substantial shocks during the period analyzed, however, we found no evidence of a structural break. Cointegration analysis indicates two stationary cointegrating vectors. Nord Pool price is found significant in the short- and the long-run model, while the gas price is insignificant in both. Other variables are significant only in the long-run model. The model shows some influence of the risk premium, however not on the long-term electricity forwards at Nord Pool.Electricity prices; long-term forward prices; VAR modeling; cointegration

A Generalized Nash-Cournot Model for the North-Western European Natural Gas Markets with a Fuel SubstitutionDemand Function: The GaMMES Model

This article presents a dynamic Generalized Nash-Cournot model to describe the evolution of the natural gas markets. The aim of this work is to provide a theoretical framework that would allow us to analyze future infrastructure and policy developments, while trying to answer some of the main criticisms addressed to Cournot-based models of natural gas markets. The major gas chain players are depicted including: producers, consumers, storage and pipeline operators, as well as intermediate local traders. Our economic structure description takes into account market power and the demand representation tries to capture the possible fuel substitution that can be made between the consumption of oil, coal and natural gas in the overall fossil energy consumption. We also take into account the long-term aspects inherent to some markets, in an endogenous way. This particularity of our description makes the model a Generalized Nash Equilibrium problem that needs to be solved using specialized mathematical techniques. Our model has been applied to represent the European natural gas market and forecast, until 2030, after a calibration process, consumption, prices, production and natural gas dependence. A comparison between our model, a more standard one that does not take into account energy substitution, and the European Commission natural gas forecasts is carried out to analyze our results. Finally, in order to illustrate the possible use of fuel substitution, we studied the evolution of the natural gas price as compared to the coal and oil prices. This paper mostly focuses on the model description.Energy markets modeling, Game theory, Generalized Nash-Cournot equilibria, Quasi-Variational Inequality

A Strategic Model of European Gas Supply (GASMOD)

Structural changes in the European natural gas market such as liberalization, increasing demand, and growing import dependency have triggered new attempts to model this market accurately. This paper presents a model of the European natural gas supply, GASMOD, which is structured as a two-stagegame of successive natural gas exports to Europe (upstream market) and wholesale trade within Europe (downstream market), and which explicitly includes infrastructure capacities. We compare three possible market scenarios: Cournot competition on both markets, perfect competition on both markets, and perfect competition on the downstream with Cournot competition on the upstream market. We find that Cournot competition on both markets is the most realistic representation of today's European natural gas market, where suppliers at both stages generate a mark-up at the expense of the final customer (double marginalization). Our results yield a diversified supply portfolio with newly emerging (LNG) exporters gaining market shares. Enforcing perfect competition on the European downstream market would result in positive welfare effects. The limited infrastructure strongly influences the results, and we identify bottlenecks mainly for intra-European trade relations whereas transport capacity on the upstream market is sufficient (with the exception of Norwegian exports) in the Cournot scenario.Natural gas, Strategic behavior, Non-linear optimization, Europe

Coal, natural gas and oil markets after World War II: what's old, what' s new?

Power resources

Options Introduction and Volatility in the EU ETS

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection

Options introduction and volatility in the EU ETS

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identi¯cation of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection

Options introduction and volatility in the EU ETS

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.

The World Gas Model: A Multi-Period Mixed Complementarity Model for the Global Natural Gas Market

We provide the description and illustrative results of the World Gas Model, a multi-period complementarity model for the global natural gas market. Market players include producers, traders, pipeline and storage operators, LNG liquefiers and regasifiers as well as marketers. The model data set contains more than 80 countries and regions and covers 98% of world wide natural gas production and consumption. We also include a detailed representation of cross-border natural gas pipelines and constraints imposed by long-term contracts in the LNG market. The Base Case results of our numerical simulations show that the rush for LNG observed in the past years will not be sustained throughout 2030 and that Europe will continue to rely on pipeline gas for a large share of its imports and consumption.

Russian gas imports in Europe: how does Gazprom reliability change the game?.

Europe’s dependence on Russian gas imports has been the subject of increasing political concern after gas conflicts between Russia and Ukraine in 2006 and 2009. This paper assesses the potential impact of Russian unreliability on the European gas market, and how it affects European gas import strategy. We also study to what extent Europe should invest in strategic gas storage capacity to mitigate the effects of possible Russian unreliability. The European gas import market is described by differentiated competition between Russia and a – more reliable – competitive fringe of other exporters. The results show that Russian contract volumes and prices decline significantly as a function of unreliability, so that not only Europe but also Russia suffers if Russia’s unreliability increases. For Europe, buying gas from more reliable suppliers at a price premium turns out to be generally more attractive than building strategic gas storage capacity.

Network-constrained models of liberalized electricity markets: the devil is in the details

Numerical models for electricity markets are frequently used to inform and support decisions. How robust are the results? Three research groups used the same, realistic data set for generators, demand and transmission network as input for their numerical models. The results coincide when predicting competitive market results. In the strategic case in which large generators can exercise market power, the predicted prices differed significantly. The results are highly sensitive to assumptions about market design, timing of the market and assumptions about constraints on the rationality of generators. Given the same assumptions the results coincide. We provide a checklist for users to understand the implications of different modelling assumptions