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Developing Futures Markets for Electricity in Europe

Risk sharing instruments, which allow consumers and producers to hedge their price-risk, are additional essential elements of the electricity reorganization process presently taking place in Europe. This paper involves tin analysis of the feasibility of establishing futures markets in the electricity sector in general and with special emphasis on steps undertaken in the United Kingdom and Norway. Even though there seems to be sufficient price uncertainty to warrant the development of futures markets, there remains the question of whether the underlying new spot-markets are yet sufficiently competitive and well-functioning. Monopolistic elements in electricity generation make it doubtful whether efficiency can be obtained through the intended (Bertrand) price competition in the spot-market. Additional problems may arise from the potential adverse response of dominant multi-objective public enterprises to the new futures markets.

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Energy Specializations: Energy Investment and Finance – Trading Strategies and Financial Instruments; Electricity – Markets and Prices

JEL Codes: Q02: Commodity Markets, Q41: Energy: Demand and Supply; Prices, Q48: Energy: Government Policy, G13: Contingent Pricing; Futures Pricing; option pricing, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels

Keywords: Electricity prices, Futures markets, Europe, UK, Norway

DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No3-5

Published in Volume 13, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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