Abstract
The existence of premiums in futures prices has been the subject of much debate. This debate has centered around two views: the no-arbitrage model or theory of storage, and the equilibrium approach, sometimes called the theory of normal backwardation. The no-arbitrage approach equates the futures price to the spot price, storage cost and convenience yield. One can see immediately that it is difficult at best to apply this approach to electricity markets, where the underlying commodity is non-storable. Storage costs and convenience yield either become infinite or lose their meaning. It is of particular interest, then, to examine these prices from the equilibrium approach, which splits futures prices into an expected spot price component and a risk premium component. (Fama and French, 1987)
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