Electricity Spot and Derivatives Pricing under Market Coupling

41 Pages Posted: 13 Jan 2014 Last revised: 20 Aug 2017

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Steffen Mahringer

University of St.Gallen - Swiss Institute of Banking and Finance

Florentina Paraschiv

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School; University of St. Gallen - School of Finance

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: August 19, 2017

Abstract

Increasing interconnectivity between electricity wholesale markets requires an efficient allocation scheme in order to provide access to scarce cross-border transmission capacities. The explicit schemes have primarily induced economically inefficient interconnector use given that flows have to be nominated prior to spot market clearing. By contrast, the market coupling mechanisms avoid these inefficiencies by implicitly allocating cross-border transmission capacity upon spot market clearance. In this paper, we show that these institutional aspects of market design clearly manifest in the empirical dynamics of both electricity spot and derivatives prices, and hence, do have important implications for pricing and hedging in these markets. Since traditional reduced-form models fail to reproduce such effects of market microstructure, we employ a fundamental multi-market model for electricity pricing in order to analyze how the key stylized facts of electricity spot, futures, and options prices are impacted by the different allocation schemes.

Keywords: Electricity Pricing, Fundamental Model, Multi-Market Modeling, Derivatives

JEL Classification: G12, G13, Q4, Q41

Suggested Citation

Füss, Roland and Mahringer, Steffen and Paraschiv, Florentina and Prokopczuk, Marcel, Electricity Spot and Derivatives Pricing under Market Coupling (August 19, 2017). University of St.Gallen, School of Finance Research Paper No. 13/23. Available at SSRN: https://ssrn.com/abstract=2378200 or http://dx.doi.org/10.2139/ssrn.2378200

Roland Füss (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Steffen Mahringer

University of St.Gallen - Swiss Institute of Banking and Finance ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Florentina Paraschiv

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School ( email )

Klæbuveien 72
Trondheim, NO-7030
Norway

University of St. Gallen - School of Finance ( email )

Klæbuveien 72
Trondheim, NO-7030
Norway

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
174
Abstract Views
2,212
rank
172,445
PlumX Metrics