Renewable Energy and Equilibrium Hedging in Electricity Forward Markets

Author:

Schwenen Sebastian1,Neuhoff Karsten2

Affiliation:

1. Technical University of Munich, School of Management, and German Institute for Economic Research, DIW Berlin

2. German Institute for Economic Research, DIW Berlin, and Technical University of Berlin, Department of Economics and Management, Berlin, Germany

Abstract

We study the impact of renewable energy on forward markets for electricity. Previous literature shows that forward prices are determined by time-varying demand and volatile spot prices. We introduce supply risk from renewable generation and find that stochastic renewable output mitigates income risk for generating firms, in particular when negative shocks to renewable output have large positive price impact. This risk off-setting effect leads to reduced hedging needs for generating companies and increases the forward premium. Using five years of high-frequency spot and futures market data, we confirm our model empirically. In sum, our findings suggest that intermittent renewable generation changes firm’s hedging incentives and has significant impact on forward prices for electricity. JEL Classification: G11, G13, Q42

Publisher

SAGE Publications

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