Pricing forward contracts in the electricity market

Burkhard Schnorrenberg

2005

Forward contracts, which are a significant part of electricity trading, play a crucial role in the German electricity market. These are contracts that fix prices now for electricity supplied later and enable speculating on future price development or hedging. The pricing of these instruments is especially interesting from a theoretical economic perspective, i.e. how the market responds to commercial uncertainties and the corresponding development of future prices.

Burkhard Schnorrenberg examines to what extent theoretical pricing for futures transactions can also be applied to electricity forward contracts, and empirically examines this using prices observed in the German electricity market. This includes an analysis of forward prices on the basis of the risk premium theory, an examination of the link between the various submarkets for forward contracts and an examination of the backwardation hypothesis. These examinations show that traditional approaches to futures pricing are only partially transferable to the electricity market or only after some modification.