Variance Of Spot Prices Research Articles

What comes down must go up: Why fluctuating renewable energy does not necessarily increase electricity spot price variance in Europe

The increase in the share of wind and solar energy has led to higher variance in electricity production. We summarize why this does not necessarily result in a higher variance in electricity spot prices but—depending on the shape of the supply curve and variance of the renewable production—can lead to lower price variance. Extending the approach of Wozabal et al. (2016), panel model and single country regression results for seven out of nine analyzed European countries confirm a U-shaped relationship between the share of renewable electricity production and price variance. While the minimum price variance for most countries is found to be between a 10% and 40% renewable electricity production share, price variance is higher for lower and higher shares. The availability of export and import capacities, flexible power plants, and hydro (pump) storage is more important for a country's ability to balance price variance than the level and variance of the renewable infeed itself. Several countries (e.g., Denmark) show how these factors can foster successful integration of high shares of renewables. The finding that the price variance decreases before it rises again in many European countries calls for policies to secure investments in flexibility options, such as grid expansion, storage facilities, flexible power plants, and demand-side management, in the period of low price variance when market-based solutions might fail and eventually lead to situations where electricity system stability is at risk.

Procurement competition in the presence of IoT-enabled B2B E-commerce

• We explore whether manufacturers give up traditional channel under B2B spot market. • Two risk-averse manufacturers engage a Cournot competition. • Manufacturers choose the optimal procurement strategy based on spot price variance. • The FN strategy may benefit the whole downstream manufacturers. • The FF subgame always benefits the whole supply chain. The Internet of things (IoT) has accelerated the development of e-commerce and enabled business-to-business (B2B) spot markets to emerge. This study considers a supply chain composed of one supplier and two manufacturers. Two manufacturers can procure raw materials from dual sources, that is, from a supplier with a forward contract or from a B2B spot market. Two manufacturers use raw materials to produce the final product and take part in Cournot competition in the final customer market. On the basis of the procurement strategies of two manufacturers, three competition structures exist between the manufacturers: (NN) both manufacturers procure raw materials only from a B2B spot market; (FN) one manufacturer procures raw materials from dual sources, namely, a forward contract and a B2B spot market, while the other manufacturer only obtains them from a B2B spot market; and (FF) both manufacturers procure raw materials from dual sources. We investigate which procurement strategy is better for manufacturers. Our study finds that the optimal setting is for manufacturers to procure raw materials from dual sources if and only if the spot price uncertainty exceeds a threshold value. Furthermore, the optimal wholesale price in the FN subgame is less than the price in the FF subgame. The optimal order quantity in the FF subgame is less than the quantity in the FN subgame. Whole downstream manufacturers can benefit from the FN strategy if the supplier’s risk aversion exceeds a threshold value. Meanwhile, the FF subgame always benefits the whole supply chain.

The effects of wind generation and other market determinants on price spikes

Electricity spot prices have shifted in response to increasing renewable energy infrastructure throughout the United States in recent decades. These shifts manifest as changes in the spot price mean and variance. One major factor influencing the variance of spot prices is the prevalence of price spikes. How renewables influence the magnitude and frequency of price spikes is not well understood. This study examines the influence of wind and additional determinants (load, nuclear generation, natural gas prices, as well as the load-to-capacity ratio) on electricity spot prices in the Electric Reliability Council of Texas system using a multiple regression mixture model framework. We focus on the influence of these determinants on the magnitude of spot prices within a low-price regime and a high-price regime, with the latter representative of price spikes. We also examine how system determinants influence the frequency of occurrence of each regime. We show that increases in wind generation drive average spot prices down in both the low and high price regime. However, system shortfalls of wind generation, particularly during times of high load, result in increased price magnitudes in both regimes, as well as more frequent price spike events.

Are fundamentals enough? Explaining price variations in the German day-ahead and intraday power market

European electricity market participants are encouraged to balance intraday deviations from their day-ahead schedules via trades in the intraday market. Together with the increasing production of variable renewable energy sources (RES), the intraday market is gaining importance. We investigate the explanatory power of a fundamental modeling approach explicitly accounting for must-run operations of combined heat and power plants (CHP) and intraday peculiarities such as a shortened intraday supply stack. The fundamental equilibria between every hour's supply stack and aggregated demand in 2012 and 2013 are modeled to yield hourly price estimates. The major benefits of a fundamental modeling approach are the ability to account for non-linearities in the supply stack and the ability to combine time-varying information consistently. The empirical results show that fundamental modeling explains a considerable share of spot price variance. However, differences between the fundamental and actual prices persist and are explored using regression models. The main differences can be attributed to (avoided) start up-costs, market states and trading behavior.

Equilibrium forward risk premiums in electricity markets

This paper develops an equilibrium electricity forward pricing model which explicitly accounts for constrained capacity. The model is able to reproduce the price spikes observed in wholesale electricity markets using reasonable parameter values. The equilibrium forward premium, defined as the forward price minus the expected spot price, decreases in spot price variance when the expected spot price is less than the retail price, but increases in spot price variance when the expected spot price is greater than the retail price. The forward premium is an increasing function of the ratio of the expected spot price to the retail price.

A jump diffusion model for spot electricity prices and market price of risk

We construct a jump-diffusion model with seasonality, mean-reversion, time-dependent jump intensity and heteroskedastic disturbance for electricity spot prices, while keeping the analytical tractability of futures prices. We find that the jump component plays a considerably larger role than the diffusion component in the variance of spot prices. Moreover, the jump intensity is much higher during summer and winter. We also explore the seasonal market price of risk (MPR) with different maturities, from one month to five months. Our results show that the diffusion risk and the jump risk are priced quite differently.

Risk Premia in Electricity Wholesale Spot Markets - Empirical Evidence from Germany

This paper contributes to the ongoing discussion on price formation in electricity markets. For this, we conduct an analysis of the German electricity wholesale spot market which is located at the European Energy Exchange (EEX). Our dataset covers three spot market segments, namely the intraday market, the block contract market and the day-ahead market. Data ranges from August 2002 to May 2009. As results we find significant positive risk premia, both in the block contract market and in the day-ahead market. The risk premia in day-ahead market contracts vary in magnitude and in sign throughout the day. Furthermore, we detect a term structure of risk premia during the sub-period in which all three market segments were simultaneously existent. When testing for seasonality in the risk premia, we find evidence for higher risk premia in the summer months. The hypothesis of a relation between the risk premia and the spot price variance and skewness has to be rejected.

Analysis of the efficiency of the Iberian power futures market

Market efficiency is analysed for the Iberian Power Futures Market and other European Power Markets, as well as other fuel markets through evaluation of ex-post Forward Risk Premium. The equilibrium price from compulsory call auctions for distribution companies within the framework of the Iberian Power Futures Market is not optimal for remuneration purposes as it seems to be slightly upward biased. In the period considered (August 2006–July 2008), monthly futures contracts behave similarly to quarterly contracts. Average risk premia have been positive in power and natural gas markets but negative in oil and coal markets. Different hypotheses are tested regarding increasing volatility with maturity and regarding Forward Risk Premium variations (decreasing with variance of spot prices during delivery period and increasing with skewness of spot prices during delivery period). Enlarged data sets are recommended for stronger test results. Energy markets tend to show limited levels of market efficiency. Regarding the emerging Iberian Power Futures Market, price efficiency is improved with market development of all the coexistent forward contracting mechanisms and with further integration of European Regional Electricity Markets.

Volatility spill-overs in commodity spot prices: New empirical results

The classical rational expectations model of commodity markets implies that expected spot price risk is an explanatory variable in spot price regressions; and also that inventory carryover, which is reduced by a larger price variance, creates autoregressive conditional heteroscedastic processes in spot prices. In order to falsify/verify this theory, it has typically been assumed that the square root of the conditional variance of spot prices, a proxy for spot price risk, enters the conditional mean function of spot prices. Based on this simple representation, a typical but counter intuitive outcome has been that spot price risk has an insignificant impact on spot prices, see, e.g., Beck (Beck, S., 1993. A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence. International Economic Review 34, 149–168, Beck, S., 2001. Autoregressive Conditional Heteroskedasticity in Commodity Spot Prices. Journal of Applied Econometrics 16, 115–132). In this paper, we propose an alternative functional relationship (from GARCH(1,1) to GARCH(1,1)-AR(m)) between spot price risk and spot prices that is fully supported by the classical rational expectations model, and based on this new representation we are able to provide stronger empirical support for Muth's rational expectation theory.

Empirical evaluation of the efficiency of the Iberian power futures market

Market efficiency is analysed for the Iberian Power Futures Market and other European Power Markets, as well as other fuel markets through evaluation of ex-post Forward Risk Premium. The equilibrium price from compulsory call auctions for distribution companies within the framework of the Iberian Power Futures Market is not optimal for remuneration purposes as it seems to be slightly upward biased, though such a premium is not significant (only around 2% above the average of Settlement Prices). In the period considered (August 2006 to September 2008), monthly futures contracts behave similarly to quarterly contracts. Average risk premia have been positive in power and natural gas markets but negative in oil and coal markets. Different hypotheses are tested regarding increasing volatility with maturity and regarding Forward Risk Premium correlations (negative with variance of spot prices during delivery period and positive with skewness of spot prices during delivery period). Enlarged data sets are recommended for stronger test results. Energy markets tend to show limited levels of market efficiency. Regarding the emerging Iberian Power Futures Market, price efficiency is improved with market development and with further integration of European Regional Power Markets.

Empirical evaluation of the efficiency of the Iberian power futures market

Market efficiency is analysed for the Iberian Power Futures Market and other European Power Markets, as well as other fuel markets through evaluation of ex-post Forward Risk Premium. The equilibrium price from compulsory call auctions for distribution companies within the framework of the Iberian Power Futures Market is not optimal for remuneration purposes as it seems to be slightly upward biased, though such a premium is not significant (only around 2% above the average of Settlement Prices). In the period considered (August 2006 to September 2008), monthly futures contracts behave similarly to quarterly contracts. Average risk premia have been positive in power and natural gas markets but negative in oil and coal markets. Different hypotheses are tested regarding increasing volatility with maturity and regarding Forward Risk Premium correlations (negative with variance of spot prices during delivery period and positive with skewness of spot prices during delivery period). Enlarged data sets are recommended for stronger test results. Energy markets tend to show limited levels of market efficiency. Regarding the emerging Iberian Power Futures Market, price efficiency is improved with market development and with further integration of European Regional Power Markets.

Constrained Capacity and Equilibrium Forward Premia in Electricity Markets

This paper extends the equilibrium electricity pricing model in Bessembinder and Lemmon (2002). The new model accounts for constrained capacity, an important feature in electricity markets. Explicitly including a role for capacity allows the model to reproduce the price spikes observed in wholesale electricity markets using reasonable parameter values. The model implies that the equilibrium forward premium, defined to be the forward price minus the expected spot price, is decreasing in spot price variance when the expected spot price is low, but is increasing in the spot price variance when the expected spot price is high. I extend the empirical work in Longstaff and Wang (2004) and show that data from the Pennsylvania-New Jersey-Maryland (PJM) market support these model predictions.

The Effect of Futures Markets and Corners on Storage and Spot Price Variability

AbstractWhen a futures market is introduced, the volume of storage should become more sensitive to changes in the return to storage. The increase in storage sensitivity means that storage will absorb a larger proportion of demand and supply shocks than it did previously, reducing spot price volatility. Data from the Chicago Board of Trade support the hypotheses of increased storage sensitivity and reduced spot price volatility. The effect of futures on spot price volatility is sensitive to the competitive structure of the futures market. Futures market manipulation causes spot price variance to increase. Despite manipulation, the development of the wheat futures market caused the coefficient of variation of spot price to decline significantly.