Volume 13, Number 3 (Sept 2020)
This issue of JEM provides four papers that demonstrate wide methodological approaches to quite different aspects of energy markets research. As such they fully illustrate the broad reach of the journal.
In the first paper, “Decomposing supply shocks in the US electricity industry: evidence from a time-varying Bayesian panel vector autoregression model by Nicholas Apergis and Michael Polemis, the authors use a novel approach for modelling the economic impact of electricity supply shocks based on a time-varying Bayesian panel vector autoregression model. It accounts for the decomposition of the electricity supply per fuel mixture and links its possible interactions with the US macroeconomic conditions. Essentially, the methodology models the coefficients as a stochastic function of multiple structural characteristics. The findings document that gross domestic product growth increases after a positive electricity supply shock, regardless of the source of energy that generates it. The absence of a sluggish adjustment mechanism may reflect weak competition and significant market power by the incumbents in the electricity industry. The results also suggest that the rate of response of gross domestic product growth per capita to electricity supply shocks indicates that a market power effect prevails in the US electricity industry.
In the second paper, also related to electricity but with a link to energy finance rather than energy economics, the authors Jørgen Andersen Sveinsson, Stein Frydenberg, Sjur Westgaard and Maurits M. Aaløkken investigate the performance of various value-at-risk (VaR) models in the context of the highly volatile Nordic power futures market, examining whether simple averages of models provide better results than the individual models themselves. The individual models used are normally distributed GARCH, t -distributed GARCH, t -distributed GJR–GARCH, a quantile regression using RiskMetrics, a quantile regression using t -distributed GARCH, RiskMetrics with Cornish–Fisher and a filtered historical simulation using t -distributed GARCH. They find that RiskMetrics with Cornish–Fisher and normally distributed GARCH perform worse than the other individual models. The average models generally outperform the individual models but the conditional independence test reveals that the models are only partially capable of accounting for the volatility clustering of the Nordic power futures. Investors in the Nordic electricity markets should therefore use several methods and average them to be more confident in their VaR estimates.
In the third paper on electricity prices, the emphasis is upon the dynamics of trading activity. Benjamin Favetto models the trading activity on the European electricity intraday market by a self-exciting Hawkes process. It provides empirical evidence of self-excitement on the European market from EPEX SPOT data, and discusses the time-homogeneity of the baseline of the process. Estimation issues are addressed from both parametric and nonparametric perspectives.
Finally, in “The LNG spot market and valuation of the re-routing option” by Hélyette Geman and Sofia Philippou, the authors start from the observation that the LNG market has experienced remarkable changes in recent years, with long-term contracts being replaced by short-term ones and optionalities granted by suppliers in a context of a large increase of natural gas production. Flexible LNG contracts give buyers the option to re-direct cargoes if they identify a higher spot price at a point different from the original destination. Their paper therefore describes the new outlook of LNG markets, which has become more and more spot-centric, with Asian LNG Futures bringing transparency to spot and forward prices, and addresses the valuation of the re-routing option, a number that must be accounted for by the buyer when assessing the profitability of a given cargo. As an example, they apply the re-routing option valuation methodology to the scenario where the supplier is the US, the original destination is Germany and the alternative destination is Japan; assuming the re-routing of the vessel takes place when the cargo reaches the waters of Germany. This approach can be used for any group of three countries by adjusting the transportation costs. The paper depicts the value of this option as a function of the volatility of the natural gas spot prices in the two destinations.
Overall, these four papers provide timely research contributions to both the macro and micro implications of electricity price dynamics, and the increased optionality in LNG trading.
Papers in this issue
Decomposing supply shocks in the US electricity industry: evidence from a time-varying Bayesian panel vector autoregression model
This paper investigates spillovers between electricity supply shocks and US growth, using monthly data from forty-eight US states from January 2001 to September 2016, and employs a novel strategy for electricity supply shocks based on a time-varying…
Performance of value-at-risk averaging in the Nordic power futures market
The authors investigate the performance of various value-at-risk (VaR) models in the context of the highly volatile Nordic power futures market, examining whether simple averages of models provide better results than the individual models themselves.
The European intraday electricity market: a modeling based on the Hawkes process
This paper deals with the modeling of trading activity on the European electricity intraday market by a self-exciting point process.
The liquefied natural gas spot market and valuation of the rerouting option
The goal of this paper is twofold: (1) to describe the new outlook of LNG markets, which has become more and more spot-centric, with Asian LNG futures bringing transparency to spot and forward prices; and (2) to address the valuation of the rerouting…