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Determinants of power spreads in electricity futures markets: A multinational analysis. ESRI WP580, December 2017

Spodniak, Petr and Bertsch, Valentin (2017) Determinants of power spreads in electricity futures markets: A multinational analysis. ESRI WP580, December 2017. [Working Paper]

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    The growth in variable renewable energy (vRES) and the need for flexibility in power systems go hand in hand. We study how vRES and other factors, namely the price of substitute fuels, power price volatility, structural breaks, and seasonality impact the hedgeable power spreads (profit margins) of the main dispatchable flexibility providers in the current power systems - gas and coal power plants. We particularly focus on power spreads that are hedgeable in futures markets in three European electricity markets (Germany, UK, Nordic) over the time period 2009-2016. We find that market participants who use power spreads need to pay attention to the fundamental supply and demand changes in the underlying markets (electricity, CO2, and coal/gas). Specifically, we show that the total vRES capacity installed during 2009-2016 is associated with a drop of 3-22% in hedgeable profit margins of coal and especially gas power generators. While this shows that the expansion of vRES has a significant negative effect on the hedgeable profitability of dispatchable, flexible power generators, it also suggests that the overall decline in power spreads is further driven by the price dynamics in the CO2 and fuel markets during the sample period. We also find significant persistence (and asymmetric effects) in the power spreads volatility using a univariate TGARCH model.

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    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > energy policy (Including international arena)
    Countries > Finland
    Countries > Germany
    Countries > Sweden
    Countries > U.K.
    Countries > Scandinavia
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Economic and Social Research Institute (ESRI), Dublin > ESRI Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 29 Dec 2019 17:20
    Number of Pages: 31
    Last Modified: 29 Dec 2019 17:20

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