Abstract
In this paper, we analyze the temporal dependence in energy prices and demand using daily data of Portugal and Spain over the period 2007–2017. The methodology used is based on a stochastic Hidden Markov Model and the results indicate first that all significant relationships between energy prices and demands were found to be positive; second, spot prices are only time dependent on future prices and spot energy, while future energy is solely time dependent on spot energy behavior; third, future prices are not only autocorrelated but also time-dependent with spot energy and future energy demands level; and finally, spot energy is autocorrelated and time-dependent with future prices and future energy. Policy implications of the results obtained are presented at the end of the article.
Highlights
Energy is an important resource for individuals, business entities as well as the macroeconomic development
Futures energy prices will significantly influence the level of futures energy demand, while futures energy prices will indirectly exert an impact of spot energy demand through spot energy prices, we argue that there should be an impact of futures energy demand on spot energy demand
As a matter of fact, spot prices are only time dependent on future prices and spot energy, this result partly supports our hypothesis H1b, our results are not exactly in line with the argument of Pindyck (2001), we find that the spot prices are not time dependent on future energy demand
Summary
Energy is an important resource for individuals, business entities as well as the macroeconomic development. In the first half of the twentieth century, the Iberian energy sector, namely the energy sector of Portugal and Spain, was different from the one of other European or OECD countries from the perspective of its higher degree of dependence on external energy. Spain and Portugal are the two countries leading the energy transition promoted by electricity generation from renewable energy sources (Perez-Franco et al, 2020). Investment in renewable energy will play a positive impact on stabilizing climate, increase employment and economic growth (Pollin et al, 2015), it will reduce GDP per capita emission as well as diminish the energy dependency (Perez-Franco et al, 2020), which is of particular importance for the Iberian Peninsula. Through the investigation of the relationship between energy price and energy demand under the propose innovative method, we would be able to establish a reasonable price mechanism in the spot and futures energy market in Iberian market, and the price mechanism will provide a guidance and motivation for these two countries to engage in the endeavor in the process of decarbonization in the energy sector by producing energy from coal sources towards sustainable ones such as wind and solar
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