Journal of Energy Markets

Electricity futures prices: time-varying sensitivity to fundamentals

Sjur Westgaard, Stein-Erik Fleten, Ronald Huisman, Mehtap Kiliç and Enrico Pennings

  • Time-variation between electricity futures prices and marginal costs of production is analysed.
  • The paper examines historical power, fossil fuel and carbon emission futures prices for Germany and the U.K.
  • The dynamics of the coefficients through formulating the model in state space is observed. 

  • Power futures contract prices relate in a time-varying manner to underlying fuel contract prices.


This paper provides insight into the time-varying relation between electricity futures prices and fundamentals in the form of contract prices for fossil fuels. As supply curves are not constant and different producers have different marginal costs of production, we argue that the relation between the prices of electricity futures and those of underlying fundamentals such as natural gas, coal and emission rights varies over time. We test this view by applying a model that linearly relates electricity futures prices to the marginal costs of production, and calculate the loglikelihood of different time-varying and constant specifications of the coefficients. To do so, we formulate the model in state-space form and apply the Kalman filter to observe the dynamics of the coefficients. We analyze historical prices of futures contracts with different delivery periods (calendar year and seasons, peak and off-peak) from Germany and the United Kingdom. The results indicate that analysts should choose a time-varying specification to relate the futures price of power to the prices of underlying fundamentals.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here