Electricity Futures Prices: Time Varying Sensitivity to Fundamentals

Journal of Energy Markets, 2015

IEB Working Paper N. 2014/21

29 Pages Posted: 25 Jul 2014

See all articles by Stein-Erik Fleten

Stein-Erik Fleten

Norwegian University of Science and Technology (NTNU)

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Mehtap Kilic

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Enrico Pennings

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Sjur Westgaard

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Date Written: May 19, 2014

Abstract

This paper provides insight in the time-varying relation between electricity futures prices and fundamentals in the form of prices of contracts for fossil fuels. As supply curves are not constant and different producers have different marginal costs of production, we argue that the relation between electricity futures prices and futures prices of underlying fundamentals such as natural gas, coal and emission rights are not constant and vary over time. We test this view by applying a model that linearly relates electricity futures prices to the marginal costs of production and calculate the log-likelihood of different time-varying and constant specifications of the coefficients. To do so, we formulate the model in state-space form and apply the Kalman Filter to observe the dynamics of the coefficients. We analyse historical prices of futures contracts with different delivery periods (calendar year and seasons, peak and off-peak) from Germany and the U.K. The results indicate that analysts should choose a time-varying specification to relate the futures price of power to prices of underlying fundamentals.

Keywords: electricity futures prices, prices of fossil fuels, time-varying coefficients, statespace model

JEL Classification: Q41, Q48, C51

Suggested Citation

Fleten, Stein-Erik and Huisman, Ronald and Kilic, Mehtap and Pennings, Enrico and Westgaard, Sjur, Electricity Futures Prices: Time Varying Sensitivity to Fundamentals (May 19, 2014). Journal of Energy Markets, 2015, IEB Working Paper N. 2014/21, Available at SSRN: https://ssrn.com/abstract=2471018 or http://dx.doi.org/10.2139/ssrn.2471018

Stein-Erik Fleten

Norwegian University of Science and Technology (NTNU) ( email )

NO-7491 Trondheim
Norway

HOME PAGE: http://www.iot.ntnu.no/users/fleten

Ronald Huisman (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Mehtap Kilic

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Enrico Pennings

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Sjur Westgaard

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

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