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The Natural Number of Forward Markets for Electricity

  • Author(s): Suenaga, Hiroaki
  • Williams, Jeffrey
  • et al.
Abstract

Observers of restructured electricity markets emphasize: (1) Spot prices are extremely variable, because electricity is not storable; (2) long-dated forward markets rarely exist – those in California were a single day ahead. Actually, the first observation implies the second. With the aid of a simulation model, which replicates the seasonality, heteroskedasticity, and serial correlation in load, the precise constellations of forward prices can be deduced in a setting of perfect competition, risk neutrality, and best possible forecasting. Even at extreme conditions in the idealized spot market, the constellations of these forward prices converge to long-run seasonal means at the horizon of just a few days. Another reason long-dated forward markets for electricity are redundant is the futures market for natural gas on NYMEX, functioning at a horizon beyond two years, as demonstrated by analyses of forecasting power using the simulation data as well as the data from NYMEX and California over 1998-2000.

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