Editor: Sjur Westgaard
Published: 24 Feb 2011
Papers in this issue
by Frowin C. Schulz
by Roger Adkins, Dean Paxson
by Ole Gjolberg, Trine-Lise Brattested
by Stein-Erik Fleten, Ane Marte Heggedal, Afzal Siddiqui
Norwegian University of Science and Technology
This special issue of The Journal of Energy Markets contains five papers that were presented at different energy seminars during 2010 (4-5 March and 17-18 June) at the Norwegian University of Science and Technology's Department of Industrial Economics and Technology Management. The purpose of the seminars was to stimulate an ongoing international dialogue among academics, practitioners and policymakers with mutual interests in energy markets and energy project investments.
These energy seminars were organized with financial support from the ongoing FINERGY (Financial EngineeringAnalysis of Investment and Operations in Electricity Markets), ELDEV (Financial Engineering Analysis of Spot and Derivatives Electricity Markets) and ELCARBONRISK (Modelling and Forecasting Risk in Electricity, Carbon and Related Energy Markets) projects. These projects are financed by Agder Energi, Statkraft, Troms Kraft, Trønder Energi, Tafjord Kraft, Eidsiva Energi, The Research Council of Norway and the Adolf Øien Foundation. The workshops provided the opportunity for researchers and practitioners to discuss issues such as the empirical modeling of energy markets, the pricing of energy derivatives and investment valuation of energy companies, and related energy decision support analysis. The papers in this issue include one on modeling the electricity risk premium, an analysis of high-frequency electricity futures prices, one about the pricing of energyswitching options and a real options analysis of transmission investments.
In the first paper, Ole Gjolberg and Trine-Lise Brattested analyze the forecasting performance of short-term futures prices in the Nordic power market. They find that short-term futures have been “upward biased” with regard to forecasts of subsequent spot prices, and also that the forecast error is considerable and has increased during recent years. The authors argue that it would be a mistake to explain the forecast error solely as a risk premium, and claim that there might be indications of market inefficiency in the Nord Pool futures market.
The second paper, by Erik Haugom, investigates stylized facts about intradaily forward electricity prices from Nord Pool, alongside distributional properties, serial correlation, volatility clustering, extreme events and the seasonality of price returns for the most liquid contract. The main findings suggest that financial electricity prices exhibit many of the stylized properties found in traditional financial markets, like high excess kurtosis for short sampling intervals, strong seasonality and long memory in the serial correlation. The results also provide new insight into how daily realized volatility of electricity prices can be divided into two components: one continuousvariation component and one jump component.
The third paper, by Frowin C. Schulz, discusses risk measures that incorporate intradaily data. Schulz’s paper investigates a selection of methods aimed at disentangling contributions from price jumps to realized variance. Flat prices (consecutively sampled prices in calendar time with the same value) and no trading (no price observation at sampling points) can cause considerable bias in methods that separate the continuous and jump parts of realized variance. With this in mind, Schulz proposes statistical methods that are robust against the finite sample issues. The new approach is tested in realistic Monte Carlo experiments and is shown to be extraordinarily resistant to varying levels of flat prices, with no trading bias. This strength is also illustrated in an empirical application using exchange-traded electricity forward prices on the Nord Pool Energy Exchange.
The last two papers apply option pricing methodology to energy production and investment decisions. In the first of these, Roger Adkins and Dean Paxson investigate reciprocal energy-switching options.After discussing various energy source switching opportunities, they provide a quasi-analytical solution for a general switching model and for two alternative energy inputs with fixed switching costs. They also consider easier analytical solutions for a single switching opportunity – appropriate for national decisions regarding energy capacity (nuclear or natural gas) – and for perpetual energy alternatives with variable switching costs. Illustrations and sensitivity analyses are provided for these models, along with comments on the computational ease of the proposed solutions, and suggestions for model extensions.
Finally, Stein-Erik Fleten, Ane Marte Heggedal and Afzal Siddiqui apply real options analysis to transmission investments between two electricity markets. The authors investigate the alternatives open to an investor holding a unique right to construct transmission capacity between Norway and Germany. They use a real options valuation framework to decide which capacity options should be chosen and when the investment should be carried through. Sequential decisions are also allowed regarding transmission capacity investment. Furthermore, the authors combine information from a bottom-up model, which estimates the reduction in average price differences due to the investment itself, and a top-down model for finding the values and optimal decisions.
The energy conferences consisted of a series of seminars with topics related to decision models for energy markets. As many of the topics described and analyzed in this issue can (and will) be extended in various directions, we intend to follow up with other related seminars during 2011.
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