Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity

121 Pages Posted: 29 Apr 2020 Last revised: 13 Jun 2022

See all articles by Akshaya Jha

Akshaya Jha

Carnegie Mellon University; National Bureau of Economic Research (NBER)

Frank Wolak

National Bureau of Economic Research (NBER)

Date Written: June 11, 2022

Abstract

Forward markets are believed to aggregate information about future spot prices and reduce the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in markets with transaction costs. Using this measure, we show that day-ahead prices better reflect real-time prices at all locations in California's electricity market after the introduction of financial trading. We then present evidence suggesting that operating costs and input fuel use fell after the introduction of financial trading on days when the nonconvexities inherent to the production and transmission of electricity are especially relevant.

Keywords: Wholesale Electricity Markets, Virtual Bidding, Financial Trading, Forward Commodity Markets, Transaction Costs

JEL Classification: G18, L94, Q48

Suggested Citation

Jha, Akshaya and Wolak, Frank A., Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity (June 11, 2022). Available at SSRN: https://ssrn.com/abstract=3568372 or http://dx.doi.org/10.2139/ssrn.3568372

Akshaya Jha (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Frank A. Wolak

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
173
Abstract Views
649
rank
250,949
PlumX Metrics