Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity
101 Pages Posted: 29 Apr 2020
Date Written: April 4, 2020
Forward commodity markets allow more efficient risk-sharing and information aggregation, but there is little evidence that this reduces the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in commodity markets with transaction costs and use it to show that day-ahead prices better reflect real-time prices at all locations in California's wholesale electricity market after the introduction of financial trading on February 1st 2011. This results in a 2.7% reduction in market-wide production costs per megawatt-hour of electricity output in high demand days relative to low demand days after 2/1/2011.
Keywords: Wholesale Electricity Markets, Explicit Virtual Bidding, Financial Trading, Forward Commodity Markets, Information Aggregation, Transaction Costs
JEL Classification: G1, L94, Q48
Suggested Citation: Suggested Citation