PhD Defense ‘Fundamental Insights in Power Futures Prices’
TI PhD student Mehtap Kilic will defend her dissertation entitled ‘Fundamental Insights in Power Futures Prices’ on Thursday October 31st at the Erasmus University Rotterdam. Her supervisor is professor and TI fellow Enrico Pennings. Her co-supervisor is associate professor Ronald Huisman.
What factors underlie the prices of electricity power derivatives? Can patterns be found in price developments when comparing various European markets? In this dissertation Mehtap Kilic analyzes the electricity power derivative prices with respect to their fundamentals. First of all the behaviour of short-term and long-term electricity prices are analysed with respect to price risk. The increased connectivity between the Belgian, Dutch, French, German, and Nordic day-ahead markets have reduced the impact of price spikes in recent years, and the prices show similarities in patterns over time. Secondly, the findings indicate that the storability of power generated by a certain method influences the forward price formation. Especially futures prices from markets in which electricity is predominantly produced with easily storable fuels – such as coal or natural gas – contain risk premium and differ from futures prices in markets where electricity is produced by imperfectly storable fuels such as hydro, wind and solar. Electricity price forming processes cannot be detached from the prices of the fuels used for power generation. In the Netherlands, coal and natural gas futures prices influence off peak prices, and in Germany the off peak futures prices show a relation with coal futures prices. The dissertation further finds that the relation of long-term electricity futures prices to coal and natural gas futures prices vary over time according to the merit order. Especially in Germany, the increase in renewable power production changed the merit order. This has a great impact on the time varying relationship between fossil fuels and peak power prices. Consequently, futures contracts are used to hedge against price risk. This makes characterising the pricing components and perceiving the embedded risks within are highly valuable.