Electricity futures prices: some evidence on forecast power at NordPool

Hipòlit Torró

Abstract

ABSTRACT

This paper analyzes the forecast power of weekly futures prices at Nord Pool. The forecast power of futures prices is compared with a time-series model with external variables (or ARIMAX model) in the spot price. The time-series model contains external variables such as temperature, precipitation, reservoir levels and the basis (futures price minus the spot price) which, overall, reflects the typical seasonal patterns in the weekly spot price. Using the Diebold and Mariano test we show that the time-series model forecasts significantly beat the futures prices. Furthermore, forecasting average errors reveal that futures prices are significantly above the settlement spot price at the "delivery week" and that their average error size increases as the time to maturity increases. Those agents taking positions in weekly futures contracts at Nord Pool might find the estimated ARIMAX model useful for improving the process of expectations formation on the underlying spot price.