Electricity prices and power derivatives: Evidence from the Nordic Power Exchange
This paper examines the importance of the regular patterns in the behavior of electricity prices, and its implications for the purposes of derivative pricing. We analyze the Nordic Power Exchange’s spot, futures, and forward prices. We conclude that the seasonal systematic pattern throughout the year, in particular, is of crucial importance in explaining the shape of the futures/forward curve. Moreover, in the context of the one and two factor models analyzed in this paper, a simple sinusoidal function is adequate in order capture the seasonal pattern of the futures and forward curve directly implied by the seasonal behavior of spot electricity prices.