Engineering
4 years ago

Summer spike: Electricity prices soar as demand and risk increase.

The Journal of Finance
Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets
Hendrik Bessembinder, Michael L. Lemmon

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Spot power prices can be unpredictable, making it challenging to price power contracts. A new model shows that forward power prices tend to be lower than future spot prices when demand is low and risk is moderate. However, the premium in forward prices increases when demand or demand uncertainty is high due to the unique distribution of spot prices. Empirical evidence suggests that forward power prices are highest in the summer months.