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Electricity futures prices in an emissions constrained economy: Evidence from European power markets

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We investigate the economic factors that drive electricity risk premia in the European emissions constrained economy. Our analysis is undertaken for monthly baseload electricity futures for delivery in the Nordic, French and British power markets. We find that electricity risk premia are significantly related to the volatility of electricity spot prices, demand and revenues, and the price volatility of the carbon dioxide (CO2) futures traded under the EU Emissions Trading Scheme (EU ETS). This finding has significant implications for the pricing of electricity futures since it highlights for the first time the role of carbon market uncertainties as a main determinant of the relationship between spot and futures electricity prices in Europe. Our results also suggest that for the electricity markets under scrutiny futures prices are determined rationally by risk-averse economic agents.

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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, Q54: Climate; Natural Disasters and Their Management; Global Warming, G15: International Financial Markets, G12: Asset Pricing; Trading Volume; Bond Interest Rates

Keywords: Electricity futures, Emission Allowances, Risk premium, Futures pricing

DOI: 10.5547/01956574.36.3.gdas

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Published in Volume 36, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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