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In contrast to forwards and futures on storable commodities, prices of long-term electricity forwards exhibit a dynamics different to that of short-term and midterm prices. We model long-term electricity forward prices through demand and supply of electricity, adjusted with a risk premium. Long-term prices of electricity, oil, coal, natural gas, emission allowance, imported electricity, and aluminum are modeled with a vector autoregressive model (VAR). For estimation, we use weekly prices of far-maturity forwards relevant for the Nordic electricity market. Although electricity prices experienced a few substantial shocks during the period we analyzed, there is no evidence of a structural break. Cointegration analysis reveals two stationary long-run relationships between all variables except the gas price, indicating that these variables move together over time. We find some influence of the risk premium, however not on the long-term electricity forwards at Nord Pool.
Date of Publication: Nov. 2009