Schwenen Belec 2016

Renewable Energy and the Pricing of
Electricity Futures
Sebastian Schwenen (TU Munich)

& Karsten Neuhoff (DIW Berlin)
BELEC 2016, DIW Berlin
1 / 14
Motivation
• Much research on how renewable energy (wind, solar) impacts

spot power prices (Woo et al., 2011; Graf and Wozabal, 2015)
• Limited research on how intermittent renewables affect futures

prices
• We employ a simple hedging model to study price and cost risk
with intermittent generation
• We derive and estimate the futures market equilibrium
condition using EEX/EPEX data
• Need for understanding risk patterns and risk mitigation;

relates to market design debate (e.g., Hogan, 2005)
2 / 14
Renewables change spot price profile
80.00
Day-Ahead Price [in EUR/MWh]
20.00 40.00 60.00
0.00
0 10 20 30
Wind and Solar Output [in GW]
January 2012 January 2014

Fitted values Fitted values
Figure: Hourly renewable output and spot prices in the German market.
3 / 14
Related research & existing findings
• Literature typically focusses on explaining the risk premium:

futures minus expected spot price (p f − p̄)
• ”Old world” in Bessembinder and Lemmon (2002):

Uncertainty introduced by random demand
• Longstaff and Wang (2004) confirm BL using PJM data
• We add cost shocks from intermittent generation to BL

setting, albeit in simplified model
• Hedging in energy markets: Perez-Gonzalez and Yun (2013)

show its value, Aı̈d et al. (2011) study vertical integration
4 / 14
Optimal forward positions for generation
• A generating firm m has profit:
πm = p̃(qm − fm ) − cr q̃r − cth (qm − q̃r ) + p f fm (1)
where p̃ and q̃r are random variables
• Mean-variance preferences (Newbery and Stiglitz, 1981):

A
E (U(πm )) ≈ E (πm ) − 2 Var (πm ) with risk parameter A
• Optimal aggregate forward positions for generating firms:
Cov (Q̃r , p̃) p f − p̄

Fm = D + (cth − cr ) +M (2)
Var (p̃) A Var (p̃)
• Larger Cov (Q̃r , p̃) increases Fm which decreases (p f − p̄)
5 / 14
Hypotheses
We examine two hypotheses:
H1: The risk premium decreases as the covariance of renewable

output and price increases
H2: The risk premium increases with marginal costs of thermal

generation
• Add controls for the spot price variance and spot price
skewness (BL, not part of our model)
6 / 14
Data & empirical specification
f Cov (Q̃r , p̃)i

pi,j − p̄i = β0 +β1 + β2 cicoal + β3 cigas + β4 Var (p̃)i + β5 Skw (p̃)i +β6 X +ω+i,j
| {z } | 1000
{z } | {z } | {z } | {z }
Risk premium H2: Positive BL: Negative BL: Positive
H1: Negative
7 / 14
Data & empirical specification
f Cov (Q̃r , p̃)i

pi,j − p̄i = β0 +β1 + β2 cicoal + β3 cigas + β4 Var (p̃)i + β5 Skw (p̃)i +β6 X +ω+i,j
| {z } | 1000
{z } | {z } | {z } | {z }
Risk premium H2: Positive BL: Negative BL: Positive
H1: Negative
• Futures prices data from EEX: weekly and monthly peak

contracts, 2012 until 2014
• Plus data on delivery time: spot price, wind and solar output,
load, MC of conventional
• Estimate different specifications; quarterly fixed effects, time

trends, only for observations close to delivery...
7 / 14
Illustration of typical futures price observations
42.00 40.00
Futures Price [in EUR/MWh]
36.00 38.00
34.00
11/1/2013 1/1/2014 3/1/2014 5/1/2014

Tradingday
Figure: Futures prices for delivery in May 2014.
8 / 14
Illustration of typical premia observations
4
Risk Premium [in EUR/MWh]
0 -2 2
11/1/2013 1/1/2014 3/1/2014 5/1/2014

Tradingday
Figure: Risk premia for delivery in May 2014.
9 / 14
A rough look at weekly futures
10
Risk Premium [in EUR/MWh]
-5 0-10 5
-100 -80 -60 -40 -20 0

Covariance(Renewable Output, Price) [in Thousands]
Fitted values
Figure: Week-ahead risk premia for delivery in 2014 peak-weeks.
10 / 14
Regression results for weekly peak futures
Dependent variable: Risk premium
(1) (2) (3) (4) (5)
H1: Covariance(Q̃r , p̃) -0.149∗∗∗ -0.149∗∗∗ -0.111∗∗∗ -0.105∗∗∗ -0.112∗∗∗

(0.008) (0.008) (0.009) (0.009) (0.009)
H2: MC coal 0.360∗∗∗ 0.360∗∗∗ 0.276∗∗∗ 0.210∗∗∗ 0.275∗∗∗

(0.036) (0.036) (0.042) (0.043) (0.043)
H2: MC gas -0.008 -0.008 0.002 -0.021 0.003

(0.026) (0.026) (0.030) (0.031) (0.030)
BL: Price variance -0.044∗∗∗ -0.044∗∗∗ -0.030∗∗∗ -0.030∗∗∗ -0.030∗∗∗

(0.002) (0.002) (0.002) (0.002) (0.002)
BL: Price skewness 1.784∗∗∗ 1.781∗∗∗ 1.146∗∗∗ 0.690∗∗ 1.139∗∗∗

(0.203) (0.203) (0.237) (0.250) (0.243)
Weeks ahead Yes Squared No No No

Quarterly FE No No No Yes No
Time trend No No No No Yes
Sample Full Full week-ahead week-ahead week-ahead
N 1432 1432 635 635 635
Standard errors in parentheses

∗
p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
11 / 14
(1) (2) (3) (4) (5)
H1: Covariance(Q̃r , p̃) -0.149∗∗∗ -0.149∗∗∗ -0.111∗∗∗ -0.105∗∗∗ -0.112∗∗∗

(0.008) (0.008) (0.009) (0.009) (0.009)
H2: MC coal 0.360∗∗∗ 0.360∗∗∗ 0.276∗∗∗ 0.210∗∗∗ 0.275∗∗∗

(0.036) (0.036) (0.042) (0.043) (0.043)
H2: MC gas -0.008 -0.008 0.002 -0.021 0.003

(0.026) (0.026) (0.030) (0.031) (0.030)

(0.002) (0.002) (0.002) (0.002) (0.002)

(0.203) (0.203) (0.237) (0.250) (0.243)

N 1432 1432 635 635 635

∗
p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
11 / 14
(1) (2) (3) (4) (5)
H1: Covariance(Q̃r , p̃) -0.149∗∗∗ -0.149∗∗∗ -0.111∗∗∗ -0.105∗∗∗ -0.112∗∗∗

(0.008) (0.008) (0.009) (0.009) (0.009)
H2: MC coal 0.360∗∗∗ 0.360∗∗∗ 0.276∗∗∗ 0.210∗∗∗ 0.275∗∗∗

(0.036) (0.036) (0.042) (0.043) (0.043)
H2: MC gas -0.008 -0.008 0.002 -0.021 0.003

(0.026) (0.026) (0.030) (0.031) (0.030)

(0.002) (0.002) (0.002) (0.002) (0.002)

(0.203) (0.203) (0.237) (0.250) (0.243)

N 1432 1432 635 635 635

∗
p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
11 / 14
Regression results for monthly peak futures
(1) (2) (3) (4) (5)
H1: Covariance(Q̃r , p̃) -0.044∗∗∗ -0.044∗∗∗ -0.092∗∗∗ -0.038∗∗∗ -0.103∗∗∗

(0.006) (0.006) (0.009) (0.009) (0.009)
H2: MC coal 0.422∗∗∗ 0.421∗∗∗ 0.340∗∗∗ 0.143∗∗∗ 0.297∗∗∗

(0.029) (0.029) (0.040) (0.036) (0.040)
H2: MC gas 0.050∗ 0.050∗ 0.051 -0.148∗∗∗ 0.046

(0.020) (0.020) (0.029) (0.027) (0.028)

(0.001) (0.001) (0.002) (0.001) (0.002)
BL: Price skewness 1.296∗∗∗ 1.293∗∗∗ 0.433∗ -1.024∗∗∗ -0.024

(0.153) (0.153) (0.220) (0.213) (0.227)
Months ahead Yes Squared No No No

Sample Full Full month-ahead month-ahead month-ahead
N 1940 1940 708 708 708

∗
p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
12 / 14
(1) (2) (3) (4) (5)
H1: Covariance(Q̃r , p̃) -0.044∗∗∗ -0.044∗∗∗ -0.092∗∗∗ -0.038∗∗∗ -0.103∗∗∗

(0.006) (0.006) (0.009) (0.009) (0.009)
H2: MC coal 0.422∗∗∗ 0.421∗∗∗ 0.340∗∗∗ 0.143∗∗∗ 0.297∗∗∗

(0.029) (0.029) (0.040) (0.036) (0.040)
H2: MC gas 0.050∗ 0.050∗ 0.051 -0.148∗∗∗ 0.046

(0.020) (0.020) (0.029) (0.027) (0.028)

(0.001) (0.001) (0.002) (0.001) (0.002)

(0.153) (0.153) (0.220) (0.213) (0.227)

N 1940 1940 708 708 708

∗
p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
12 / 14
(1) (2) (3) (4) (5)
H1: Covariance(Q̃r , p̃) -0.044∗∗∗ -0.044∗∗∗ -0.092∗∗∗ -0.038∗∗∗ -0.103∗∗∗

(0.006) (0.006) (0.009) (0.009) (0.009)
H2: MC coal 0.422∗∗∗ 0.421∗∗∗ 0.340∗∗∗ 0.143∗∗∗ 0.297∗∗∗

(0.029) (0.029) (0.040) (0.036) (0.040)
H2: MC gas 0.050∗ 0.050∗ 0.051 -0.148∗∗∗ 0.046

(0.020) (0.020) (0.029) (0.027) (0.028)

(0.001) (0.001) (0.002) (0.001) (0.002)

(0.153) (0.153) (0.220) (0.213) (0.227)

N 1940 1940 708 708 708

∗
p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001
12 / 14
Conclusion & discussion
• We model how renewable output risk impacts hedging needs

and thus futures prices
• Premium increases for generation the more renewable output
and price risk offset each other
• We support this finding using EEX/EPEX data
• Some weaknesses and scope for extensions:

• Is it reasonable to focus on representative market portfolio?
• What is the impact of renewable support schemes?
• Estimate spot prices to proxy expectations
• Room for more research on relatively young ”Energiewende”

futures: Phelix-Sun Peak Futures, Wind Futures
13 / 14
Thank you
14 / 14

Schwenen Belec 2016

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Renewable Energy and the Pricing of

Sebastian Schwenen (TU Munich)

BELEC 2016, DIW Berlin

• Much research on how renewable energy (wind, solar) impacts

• Limited research on how intermittent renewables affect futures

• Need for understanding risk patterns and risk mitigation;

January 2012 January 2014

• Literature typically focusses on explaining the risk premium:

• ”Old world” in Bessembinder and Lemmon (2002):

• Longstaff and Wang (2004) confirm BL using PJM data

• We add cost shocks from intermittent generation to BL

• Hedging in energy markets: Perez-Gonzalez and Yun (2013)

• A generating firm m has profit:

πm = p̃(qm − fm ) − cr q̃r − cth (qm − q̃r ) + p f fm (1)

where p̃ and q̃r are random variables

• Mean-variance preferences (Newbery and Stiglitz, 1981):

• Optimal aggregate forward positions for generating firms:

Cov (Q̃r , p̃) p f − p̄

• Larger Cov (Q̃r , p̃) increases Fm which decreases (p f − p̄)

We examine two hypotheses:

H1: The risk premium decreases as the covariance of renewable

H2: The risk premium increases with marginal costs of thermal

f Cov (Q̃r , p̃)i

f Cov (Q̃r , p̃)i

• Futures prices data from EEX: weekly and monthly peak

• Estimate different specifications; quarterly fixed effects, time

11/1/2013 1/1/2014 3/1/2014 5/1/2014

Figure: Futures prices for delivery in May 2014.

11/1/2013 1/1/2014 3/1/2014 5/1/2014

Figure: Risk premia for delivery in May 2014.

-100 -80 -60 -40 -20 0

Figure: Week-ahead risk premia for delivery in 2014 peak-weeks.

Dependent variable: Risk premium

(1) (2) (3) (4) (5)

H1: Covariance(Q̃r , p̃) -0.149∗∗∗ -0.149∗∗∗ -0.111∗∗∗ -0.105∗∗∗ -0.112∗∗∗

H2: MC coal 0.360∗∗∗ 0.360∗∗∗ 0.276∗∗∗ 0.210∗∗∗ 0.275∗∗∗

H2: MC gas -0.008 -0.008 0.002 -0.021 0.003

BL: Price variance -0.044∗∗∗ -0.044∗∗∗ -0.030∗∗∗ -0.030∗∗∗ -0.030∗∗∗

BL: Price skewness 1.784∗∗∗ 1.781∗∗∗ 1.146∗∗∗ 0.690∗∗ 1.139∗∗∗

Weeks ahead Yes Squared No No No

Standard errors in parentheses

Dependent variable: Risk premium

(1) (2) (3) (4) (5)

H1: Covariance(Q̃r , p̃) -0.149∗∗∗ -0.149∗∗∗ -0.111∗∗∗ -0.105∗∗∗ -0.112∗∗∗

H2: MC coal 0.360∗∗∗ 0.360∗∗∗ 0.276∗∗∗ 0.210∗∗∗ 0.275∗∗∗

H2: MC gas -0.008 -0.008 0.002 -0.021 0.003

BL: Price variance -0.044∗∗∗ -0.044∗∗∗ -0.030∗∗∗ -0.030∗∗∗ -0.030∗∗∗

BL: Price skewness 1.784∗∗∗ 1.781∗∗∗ 1.146∗∗∗ 0.690∗∗ 1.139∗∗∗

Weeks ahead Yes Squared No No No

Standard errors in parentheses

Dependent variable: Risk premium

(1) (2) (3) (4) (5)

H1: Covariance(Q̃r , p̃) -0.149∗∗∗ -0.149∗∗∗ -0.111∗∗∗ -0.105∗∗∗ -0.112∗∗∗

H2: MC coal 0.360∗∗∗ 0.360∗∗∗ 0.276∗∗∗ 0.210∗∗∗ 0.275∗∗∗

H2: MC gas -0.008 -0.008 0.002 -0.021 0.003

BL: Price variance -0.044∗∗∗ -0.044∗∗∗ -0.030∗∗∗ -0.030∗∗∗ -0.030∗∗∗

BL: Price skewness 1.784∗∗∗ 1.781∗∗∗ 1.146∗∗∗ 0.690∗∗ 1.139∗∗∗

Weeks ahead Yes Squared No No No

Standard errors in parentheses

Dependent variable: Risk premium

(1) (2) (3) (4) (5)

H1: Covariance(Q̃r , p̃) -0.044∗∗∗ -0.044∗∗∗ -0.092∗∗∗ -0.038∗∗∗ -0.103∗∗∗