Volume 7, Number 4 (December 2014)
Electricity markets offer a rich and evolving context in which to research the coevolution of market mechanisms and energy policy. When prices become inefficient, it is usually the case that regulatory and policy interventions quickly follow. Furthermore, when government polices seek to achieve a fundamental change in the technologies used to generate power, the disruptive effects on electricity price formation and the adjustment costs to end users are substantial. We link aspects of the interrelation of policy and price formation through the four papers included in this issue of The Journal of Energy Markets.
The policy and regulatory changes currently taking place in Germany are remarkable and it is in this context that Hubertus Bardt and Hanno Kempermann look at how the abandonment of nuclear power and the new focus on renewable energy sources represent a fundamental change in the structure of Germany's electricity supply, leading to substantially higher retail prices. In their paper "The German Energiewende: is the manufacturing sector at risk?", they find that, in the case of the manufacturing sector, the resulting increase in energy costs has so far been mitigated by exempting the energy-intensive sectors that are most affected. However, this creates insecurity, as the policy may not persist. Moreover, the price and cost effects of German energy policy are not simply restricted to energy-intensive enterprises. While the metal-production industry, parts of the chemical industry and some other industries have to deal with higher price risks, other sectors are indirectly linked to these electricity consumers in complex value chains. Large segments of the manufacturing sector work closely with energy-intensive companies. These dense networks have been particularly instrumental in the joint development of innovations, which has been one of German industry's main competitive advantages. This strength of the German economy may be at risk if the future of electricity-intensive industries is hampered by rising national energy prices. A potential relocation of energy-intensive companies to other countries would therefore spill over into other areas of German industry. These risks therefore need to be compared with the new market opportunities provided by the energy policy changes.
In the issue's second paper, "Electricity retailers' behavior in a highly competitive Nordic electricity market" by Iliana Ilieva and StevenA. Gabriel, the focus is still on the policy impacts on end users, but this time from a retailing perspective. In particular,the authors look at the topic of smart meters with two-way communication and realtime pricing. With the help of smart meter technologies, retailers are expected to be able to significantly increase the range of their service offerings. This paper describes the present status of the Nordic retail market for electricity and discusses the impact of regulatory changes on retailers' profits, price mark-ups and service investment. The results from model simulations indicate that the price and service decisions made by one retailer will have a strong impact on the market strategy of others.
In our third paper, "The forecasting power of medium-term futures contracts" by Erik Haugom, Guttorm A. Hoff, Maria Mortensen, Peter Molnár and SjurWestgaard, weekly futures prices, covering the time period 1996-2013, are analyzed to see if they are unbiased predictors of future spot price in the Nordic power market. The efficiency of forward markets is an important consideration for the risk management activities of market participants, especially end users. The results in this paper give no clear evidence of bias in futures prices, except during the winter periods between 2003 and 2009. During this period the futures prices overshoot the spot price, resulting in a positive risk premium. Consistent with several studies, the authors find that the premium has recently been declining, making the forward markets more efficient.
While power markets show any distinctive price formation features, they are also idiosyncratic to the local resources, infrastructure and regulatory interventions. While the Russian power market is not as well-researched as Nordic and German wholesale prices, it nevertheless has some important features. In the last paper in the issue, "Time regularities in the Russian power market", Igor Pipkin describes the day-of-the-week and intraday price patterns in the Russian "European" and "Siberian" zones. The magnitude of the price difference and the time lag between the zones raise the crucial issues of improving interconnector capacity and/or increased use of more flexible technologies and demand-side engagement within the less efficient European zone.
All four of these papers demonstrate themes that The Journal of Energy Markets seeks to connect through model-based analysis. Price formation mechanisms, risk and policy interact in an evolutionary manner within energy markets. This issue has focussed upon electricity, but similar challenges emerge in seeking to understand oil and gas and their related markets.
Derek W. Bunn
London Business School
Papers in this issue
The German Energiewende: is the manufacturing sector at risk?
Electricity retailers’ behavior in a highly competitive Nordic electricity market
The forecasting power of medium-term futures contracts
Time regularities in the Russian power market