Part 1 of this two-part special issue of The Journal of Energy Markets contains three papers that were presented at different energy seminars during 2011 at the Norwegian University of Science and Technology and Lillehammer University College. The fall edition of The Journal of Energy Markets will form part 2 of this special issue and will contain the remaining four papers presented.
The purpose of the seminars was to stimulate an ongoing international dialogue among academics, practitioners and policymakers with mutual interests in energy markets and energy project investments. These energy seminars were organized with financial support from the ongoing ELCARBONRISK project (Modeling and Forecasting Risk in Electricity, Carbon and Related Energy Markets). The project is financed by Tafjord Kraft, Eidsiva Energi and the Research Council of Norway. The workshops provided an opportunity for researchers and practitioners to discuss issues such as the empirical modeling of energy markets, the pricing/hedging of energy derivatives, risk management, corporate finance for energy companies, investment valuation of energy projects and decision support analysis in the energy sector.
The papers in this issue focus on time-varying correlation modeling of energy prices, cointegration between oil and gas markets, and analysis of transmission congestion and market power.
In the first paper, "Time-varying dependency in European energy markets: an analysis of Nord Pool, European Energy Exchange and Intercontinental Exchange energy commodities", Steinar Veka, Gudbrand Lien, Sjur Westgaard and Helen Higgs investigate time-varying dependencies in European energy markets. Electricity future contracts from Nord Pool are analyzed with electricity, oil, gas, coal and carbon futures from the Intercontinental Exchange and the European Energy Exchange using a dynamic conditional correlation model. The Nord Pool electricity contract has the highest correlation with the European Energy Exchange electricity contract and the lowest correlation with the Brent crude oil contract. As the contract length increases, higher correlation between the markets is found. Over the period studied, the authors also find a higher correlation between markets in general, which is interpreted as stronger integration of European energy markets. The stylized facts from this paper will be important for risk management of portfolios consisting of various energy commodities and also for the pricing of (financial or real) derivatives that are contingent on several underlying energy markets.
The second paper, "Are oil and natural gas going separate ways in the United Kingdom? Cointegration tests with structural shifts" by Roy Endre Dahl, Atle Oglend, Petter Osmundsen and Marius Sikveland, also investigates dependencies between energy markets. In this study, cointegration analyses between UK gas spot prices and North Sea oil spot prices are performed. In the analysis, they find that there was an endogenous structural shift in 2006 and 2007, followed by much weaker cointegration between the gas and oil markets.
The last paper in the issue, "Transmission congestion and market power: the case of the Norwegian electricity market" by Faisal Mehmood Mirza and Olvar Bergland, estimates the noncompetitive effects of transmission congestion in the Norwegian electricity market and tests the hypothesis that producers are able to exercise their market power under such market conditions. By using a structural model that uses hourly data from southern Norway from February 2004 to April 2008, they find, on average, competitive price formation. However, producers often exercise their market power in specific hours when the transmission constraints become binding. The markup above marginal cost in these hours, though, seems to be quite small.
The ELCARBONRISK energy conferences consisted of a series of seminars with topics related to decision models for energy markets, and to risk analysis in particular. As many of the topics described and analyzed in this issue can (and will) be extended in various directions, we intend to follow this work up with other related seminars during 2012.
Decision Support Modeling in Energy Markets: Part 1
LETTER FROM THE GUEST EDITOR
Sjur Westgaard - Norwegian University of Science and Technology
Time-varying dependency in European energy markets: an analysis of Nord Pool, European Energy Exchange and Intercontinental Exchange energy commodities
Are oil and natural gas going separate ways in the United Kingdom? Cointegration tests with structural shifts