Journal of Energy Markets

Kostas Andriosopoulos
Alba Graduate Business School

This issue of The Journal of Energy Markets contains three research papers.

The first paper in this issue, “Including climate-induced jumps in forward price trends in wholesale energy markets” by Luis Antonio Pascua-Guerra and Javier Orlando Pantoja-Robayo, explores an innovative forward contract pricing model to mitigate price risk in electricity markets. It is based on a stochastic process, incorporating a climate risk factor as its main contribution. In addition, the forward risk premium derived from the model is analyzed and is adjusted using a generalized autoregressive conditional heteroscedasticity (GARCH) model to improve future price estimates in the Colombian wholesale electricity market. The authors provide empirical evidence that the introduced approach makes the market more complete and fairer for all participants, particularly in the case of hydroelectric generation. The proposed model has significant implications for market participants, as it provides a more realistic, and therefore fairer, price assessment.

In the issue’s second paper, “International evidence on the industrial affordability of deep decarbonization”, K. H. Cao, Y. S. Cheng, H. S. Qi and C. K.Woo investigate the industrial affordability of deep decarbonization in International Energy Agency (IEA) member countries. The study employs a newly developed formula to calculate an industry-specific index, equivalent to the incremental energy cost due to deep decarbonization divided by the value added. Using carbon intensity data purchased from the IEA and effective carbon rates, the authors find that industrial affordability declines with an industry’s carbon intensity, a country’s effective carbon rate and its deep decarbonization target. Hence, the recommendation in pursuance of the call for net zero is a politically feasible deep decarbonization strategy with public support enabled by gradual implementation, exemptions and subsidies.

Moving on to look at the role of renewables in future grids, our third and final paper, “Quantifying renewables reliability risk in modern and future electricity grids” by Arvind Shrivats, Ronnie Sircar and Xinshuo Yang, proposes a methodology for quantifying, allocating and accounting for the risk introduced to electricity production from the unpredictable intermittency of renewable resources such as wind and solar. Incorporating this stochasticity into grid risk management is viewed by the industry as being increasingly crucial, given the aim of greater renewables penetration to reduce dependence on carbon-emitting fuels. The methodology described in this paper involves feeding Monte Carlo simulations of solar generation, wind generation and demand into grid optimization software that emulates the performance and costs of the Texas electricity grid. The study proposes a way to incorporate the reliability costs back into the day ahead bid curve and thereby to reoptimize unit commitment and economic dispatch of assets while considering the probabilistic nature of supply from renewables.