The Plunge in German Electricity Futures Prices – Analysis Using a Parsimonious Fundamental Model

Energy Policy, Volume 95, August 2016, Pages 280-290, Forthcoming

Posted: 29 May 2015 Last revised: 18 May 2016

Thomas Kallabis

University of Duisburg-Essen

Christian Pape

University of Duisburg-Essen

Christoph Weber

University of Duisburg-Essen

Date Written: April 1, 2015

Abstract

The German market has seen a plunge in wholesale electricity prices from 2007 until 2014, when base futures prices dropped by more than 40 percent. In this paper we determine the fundamental components of electricity futures prices and quantify their impact on the price drop as well as on operation margins. Our methodology is based on a parsimonious model in which the supply stack is approximated by piecewise linear functions. A fundamental futures price estimate can then be given by averaging up the hourly equilibrium prices over the futures contract’s delivery period. It turns out that the parsimonious model is able to replicate electricity futures prices and discover non-linear dependencies in futures price formation. We quantify which of the factors fuel prices, emission prices, renewable feed-in, conventional generation capacities, and demand developments contributed most to the observed price slide.

Keywords: Futures Prices, Bid Stack, Fundamental Factors, German Electricity Market, Price Modeling, Efficient Markets, Market Expectations, Piecewise Linear Function, Investment Decision

JEL Classification: Q43, O10

Suggested Citation

Kallabis, Thomas and Pape, Christian and Weber, Christoph, The Plunge in German Electricity Futures Prices – Analysis Using a Parsimonious Fundamental Model (April 1, 2015). Energy Policy, Volume 95, August 2016, Pages 280-290, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2611079 or http://dx.doi.org/10.2139/ssrn.2611079

Thomas Kallabis

University of Duisburg-Essen

Universitätsstr. 12
Essen, 45117
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

Christian Pape (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstr. 12
Essen, 45117
Germany

Christoph Weber

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

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