Journal of Energy Markets

Derek W. Bunn

London Business School

For this issue, we have compiled three important research papers and a first contribution to a new section on software reviews, which we hope will become an active feature of the journal. This reviews theAMES test bed for wholesale power markets. This software will interest readers not only because it is open source, with all of the research implications that that creates, but also because it is based on facilitating agent-based simulation, which is becoming increasingly topical for developing insights into market structure and the exercise of market power. Li and Tesfatsion, the developers, provide a reflective analysis of the software design.

In the opening paper of this issue, “Pricing of hourly exercisable electricity swing options using different price processes”, Hirsch applies three different two-factor models (a regime-switching AR process, a jump-diffusion process with Bernoulli jump terms and a normal inverse Gaussian process) to the problem of Monte Carlo pricing of swing options with up to 5,000 exercise rights. Spot power data from the European Energy Exchange is used. This is a challenging area of analysis and a topic that has been of considerable interest to researchers and traders for several years.

Also in a German context, but taking a more economic than financial perspective, Möst and Genoese contribute the second paper in the issue. It is on market power analysis. Although it has been conventionally assumed that German power utilities have been exercising market power by withholding available power plant capacity, only rarely has detailed analysis of this been published. In their paper the authors investigate the exercise of market power in the German wholesale electricity market with an agent-based simulation model that uses a detailed system representation. The results provide a more circumspect interpretation of the exertion of market power by dominant German power companies than is usually presumed.

Finally, we include a paper on the increasingly important topic of carbon trading. In their “Impacts of regulatory announcements on CO2 prices”, Mansanet-Bataller and Pardo analyze the impact of more than 70 regulatory announcements during the period from October 2004 to May 2007 on European Union Emission Trading Scheme carbon prices and their volatility. Using an innovative truncated mean model for the event studies, the results indicate that news has an influence on carbon prices on both the day of announcement and on previous days, but it has no effect on volatility. The findings suggest a systematic leakage of information to the market for almost all types of events. Given the importance of regulatory and policy risk to the price formation process of the European Union Emission Trading Scheme, and to other emerging cap and trade emissions markets for CO2, we expect to see an increasing amount of research in this area.