The Handbook of Commodity Investing

CHAPTER 25

The Pricing of Electricity Forwards

Dr. Matthias Muck

Professor of Finance

University of Bamberg

Markus Rudolf, Ph.D.

Professor of Finance

WHU-Otto Beisheim School of Management

The turnover in electricity markets has become increasingly important. According to the European Federation of Energy Traders (EFET) in Germany, it has been more than 2,500 TWh in 2004. This equals five times the German consumption of electricity and corresponds to approximately €75 billion. The turnover in Great Britain has been slightly below 2,500 TWh; in the Scandinavian countries it was 2,000 TWh in 2004. The leading exchange in Europe alone, the Leipzig based energy exchange EEX, exhibited a 2005 turnover of 602 TWh which implies an increase of 52% compared to the year before. In addition to the EEX, other important energy exchanges in Europe are the French Powernext, the Italian IPEX, the Dutch APX, the Austrian EXAA, the Polish PolPX, the Scandinavian Nordpool, the Slowenian Borzen, the Spanish OMEL, and the British UKPX. In January 2006, there were 133 companies from 17 countries trading energy on the EEX.

Typically, electricity prices are very volatile during the day. At night, prices usually are only half of the daytime's price. Price peaks can be observed especially between 10 A.M. and 1 P.M. as well as between 5 P.M. through 9P.M. This curiosity is due to the nonstorability of electricity. It has to be consumed immediately. Therefore, peak prices are observed when the usage of electricity ...