Journal of Energy Markets

This issue of The Journal of Energy Markets offers some detailed insights into potential market inefficiencies in power and gas trading. Clearly, it is inefficiencies that offer trading opportunities and as such these four papers should have wide appeal to both researchers and trading analysts. The key issues of practical concern evidently relate to the materiality of the inefficiencies, their sustainability and their determinants.

The issue's first paper, "Day-ahead forward premiums in the Texas electricity market" by Jay Zarnikau, Chi-Keung Woo, Carlos Gillett, Tony Ho, Shuangshuang Zhu and Eric Leung, looks at forward and spot market-price convergence in the competitive Texas electricity market in the presence of large-scale wind generation. This analysis has relevance to many markets around the world that are undergoing similar technological transformations to renewable and intermittent generation. Using a large data sample of over 30 000 hourly observations from 2010 to 2014, they find that hourly, day-ahead forward premiums vary by time of day and time of year. The levels of the premiums are small but they increase with more wind generation. Surprisingly, however, an increase in wind generation tends to reduce the forward premium's volatility for nearly all hours. Taken together, these findings suggest that the Electric Reliability Council of Texas's day-ahead and real-time markets exhibit modest trading inefficiency. But making a sizable arbitrage profit on a consistent basis is difficult because of the unpredictable nature of wind generation, and it is argued that improved wind forecasts would not necessarily offer clearer arbitrage positions.

In the second paper in the issue, "Price determinants in the German intraday market for electricity: an empirical analysis" by Simon Hagemann, we look again at hourly electricity prices, but in this case in the German intraday market. As Europe's crucial real-time market, this market attracts a lot of attention. Fundamental price determinants include unplanned power plant outages, forecast errors of wind and solar power production, load forecast errors, foreign demand and supply, the nonlinearity of the merit order and ramping costs. Using regression-based modeling, the author's results show that the price impacts of supply-side shocks are stronger if market participants are unable to balance intraday deviations internally and if intraday liquidity provisions are low. This is one of the first German studies to develop significant intraday estimates of the driving factors, as distinct from day-ahead modeling.

Moving from power to gas, in "Are world natural gas markets moving toward integration? Evidence from the Henry Hub and National Balancing Point forward curves", Helyette Geman and Bo Liu investigate whether the US and UK gas markets are moving toward integration. As well as looking at the cointegration of the Henry Hub and National Balancing Point indexes, the authors also introduce the novel concept of distances between forward curves. From these perspectives, and analyzing a database covering the period January 2005-April 2014, they conclude that no convergence has yet occurred between these two markets. This clearly has strong implications for spread trading.

In the final paper in the issue, which is also on the theme of gas trading, Anastasia V. Shcherbakova, Andrew Kleit and Bagas Dhanurendra present a study on "Exploring shipping inefficiencies in global liquified natural gas trade patterns". They examine GPS-communicated data on liquefied natural gas (LNG) tanker movements between January 2011 and August 2012 to determine the possible drivers of apparently inefficient shipping routes from producing to consuming countries. They find that perceived routing inefficiencies are actually driven by market forces such as peak demand seasons, spot cargos and transportation constraints, induced by a tightening of the shipping market and a rise in spot charter costs. Economies of scale in tanker technology do not appear to play a role in the formation of observed shipping routes, with higher capacity tankers being associated with more "efficient" (ie, shorter) voyages. Finally, vessels operated by vertically integrated energy companies appear to be associated with more efficient (or shorter) voyages than LNG tankers operated by independent shipping firms.

Taken together, these four papers demonstrate the value of careful modeling in seeking to explore apparent market inefficiencies. They illustrate very effectively the kind of research value and practical impact that The Journal of Energy Markets is seeking to achieve.

Derek W. Bunn
London Business School

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