Journal of Energy Markets

The risk markup of intermittent renewable supply in German electricity forward markets

Marius Paschen

  • Positive monthly wind shocks on the forecast error of the forward premium are found.
  • Effects underline the need to introduce wind power futures at the European Energy Exchange (EEX).
  • No daily wind shock and solar shock effects are found (in line with EEX).

Renewable energy sources such as wind or solar power currently make up a large share of the total German electricity supply as a result of the German energy transition. This paper presents an empirical analysis of how power shocks resulting from intermittent renewables affect the forecast error of the forward premium in German electricity markets. We extend the existing literature by investigating determinants of forward premiums, focusing on both wind and solar power. We find positive monthly wind shock effects on forecast errors, ie, a specific risk markup on forward prices. These findings underline the need to introduce wind power futures at the European Energy Exchange (EEX) in order to reduce the risk markup for participants in forward markets. No daily wind shock or solar shock effects are found. One explanation for this could be the almost perfect approximations of the expected spot price. This is in line with the EEX’s strategy, which does not create wind power futures for contracts with maturities of days. The wind shock effect on monthly peak-load premium is larger than that on base-load premiums. This is likely due to higher differences in marginal costs on the right-hand side of the merit order curve.

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