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risk premia in electricity wholesale spot markets – Empirical evidence from germany
Matthäus Pietz, TU München, +49 89 28925487,
Overview
Electricity exchanges are generally characterized by a relatively low number of market participants and a low trading volume.This is due to the fact that they are designed as wholesale markets.This has generated an ongoing discussionon whether price formation in these markets is efficient or whether price manipulation is possible. This paper aims to contribute to this discussion through an analysis of the price formation in the German electricity wholesale spot market. Trading in the German spot market in its current form started in 2002. Initially there were two market segments, a day-ahead and a block contract market. An intraday market was later established and the block contract market was closed. Specific blocks of (successional) hoursare traded in the block contract market whereas single hour contracts are traded in the day-ahead and intraday market. All contracts in the spot market imply physical settlement. Contracts traded in different market segments have to some extent identical delivery periods. Trading in the block contract market and in the day-ahead market takes place over of a period of one to three days before delivery. In the intraday market trading takes place up to 75 minutes before delivery.
In an efficient commodity market with risk-neutral market participants, identical contracts – except for the time-to-delivery – should, at least on average, have the same price. Based on this assumption one would expect the same price for contracts with identical delivery periods in all market segments of the spot market. However, empirical research shows that this is not the case in electricity markets, neither in spot markets ([1]) nor in futures markets ([2]). The results of this research suggest that in electricity spot markets prices are higher in market segments where trading takes place at an earlier time.
The research of this paper is related to the work of [3] and [4] regarding the German market. [3] conduct a first empirical analysis of the block contract market; [4] conducts a first empirical analysis of the day-ahead market. We confirm the results obtained for the block contract market and find similar results for the day-ahead market. However, our estimate of the risk premia in the day-ahead market is different than the one of[4]. Our results are also in line with results obtained by [5] regarding the German futures market.
Methods
Our dataset consists of data from the EEX for the period August 2002 to May 2009 (day-ahead market), August 2002 to August 2008 (block market) and September 2006 to May 2009 (intraday market).
We estimate the risk premia in the various contracts traded in the spot market from an ex-post perspective. Using several econometric methods we find systematic patterns in the risk premia.
Results
Our analysis of the German spot market yields the following results: we find evidence supporting the existence of significant risk premia. These risk premia are positive, i.e. identical contracts are priced higher in market segments where trading takes place earlier. The positive risk premia are observed in both the block contract market and the day-ahead market. Thus both block contracts and day-ahead market contracts are upward-biased estimators of the expected spot prices during the delivery period. When analyzing the day-ahead market, we also find that the risk premia are extreme volatile and change in sign throughout the day. After testing for seasonality in the risk premia we detect evidence of higher (positive) risk premia in summer months. Furthermore, we find evidence of a term structure of risk premia when analyzing the period in which all three market segments were simultaneously active. Risk premia seem to be higher in contracts with a longer time-to-delivery. The analysis of potential drivers yields no significant results for the relation between the risk premia and the variance and skewness of the realized spot prices.
Conclusion
We show that there are significant risk premia in the German electricity wholesale spot market. These results are consistent with the existing literature The obtained risk premia are mainly positive. Similar to [5] we also find evidence supporting a term structure of risk premia in the German market.
Further research will focus on the drivers of the risk premia, see e.g. [6] for first results.
References
- Longstaff, F.A., Wang, A.W. (2004). Electricity forward prices: A high-frequency empirical analysis. Journal of Finance, Vol. 59, 1877-1900.
- Shawky, H.A., Marathe, A., Barrett, C.L. (2003). A first look at the empirical relation between spot and futures electricity prices in the United States. Journal of Futures Markets, Vol. 23, 931-955.
- Ronn, E.I., Wimschulte, J. (2009). Intra-day risk premia in European electricity forward markets. Working Paper, University of Texas at Austin, July 2009.
- Viehmann, J. (2009). Risk premiums in the German day-ahead electricity market.Working Paper, University of Cologne, June 2009.
- Pietz, M. (2009). Risk premia in the German electricity futures market.Working Paper, TechnicalUniversity of Munich, May 2009.
- Daskalakis, G., Markellos, R.N. (2009). Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, Nord Pool and Powernext.Energy Policy, Vol. 37, 2594-2604.