Abstract
This study measures the connectedness of natural gas and electricity spot returns to their futures returns with different maturities. We employ the Henry Hub and the Pennsylvania, New Jersey, and Maryland (PJM) Western Hub Peak as the natural gas price indicator and the wholesale electricity price indicator, respectively. We also use each commodity’s spot prices and 12 types of futures prices with one to twelve months maturities and realize results in fourfold. First, we observe mutual spillover effects between natural gas futures returns and learn that the natural gas futures market is integrated. Second, we observe the spillover effects from natural gas futures returns to natural gas spot returns (however, the same is not evident for natural gas spot returns to natural gas futures returns). We find that futures markets have better natural gas price discovery capabilities than spot markets. Third, we observe the spillover effects from natural gas spot returns to electricity spot returns, and the spillover effects from natural gas futures returns to electricity futures returns. We learn that the marginal cost of power generation (natural gas prices) is passed through to electricity prices. Finally, we do not observe any spillover effects amongst electricity futures returns, except for some combinations, and learn that the electricity futures market is not integrated.
Highlights
The main goal of this study is to clarify differences caused by maturity differences of natural gas and wholesale electricity futures, and differences between their spot and futures due to their commodity characteristics by examining the spillover effects among their futures with various maturities and spot markets
While we can expect the hypothesis of spillover from natural gas market to peak power market because natural gas is often marginal fuel, we can expect the hypothesis that there is no arbitrage trading among their futures and spot markets because we cannot store natural gas and electric energy
We argue that the price return of natural gas spot has a greater effect on the price return of wholesale peak power spot, which is directly produced from gas, than on the price return of natural gas futures by arbitrage trading
Summary
The main goal of this study is to clarify differences caused by maturity differences of natural gas and wholesale electricity futures, and differences between their spot and futures due to their commodity characteristics by examining the spillover effects among their futures with various maturities and spot markets. 0.9%, according to BP Statistical Review of World Energy 2019, 68th edition [1]. These statistics imply that natural gas is the main fuel for power generation. Since the cost of procuring natural gas is the marginal cost of power generation, the relationship between the wholesale electricity market and the natural gas market is of great academic and practical interest.
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