Dynamic Equilibrium Valuation of Electricity Futures

Abstract

We propose a dynamic competitive equilibrium model for pricing electricity futures. With exogenous demand and a convex function of marginal production cost, we endogenously receive a term structure of futures prices and futures price premia. The multi-period setting enables us to receive the futures price evolution until maturity and to evaluate cascade futures as they are common e. g. at Nord Pool and the European Energy Exchange. Our model allows to incorporate seasonality of electricity demand which is a major component of electricity prices. A comprehensive comparative static analysis concludes our paper.

Keywords: Electricity futures, cascade futures, dynamic equilibrium pricing, risk premium

JEL Classification: G13