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Handika, Rangga

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  • Paper Title: Analysing the Relationship between Spot and Futures Prices in Australian Electricity Markets
  • Department Affiliation: Applied Finance and Actuarial Studies
  • Supervisor's Names:
    •  Associate Professor Stefan Trueck

Purpose: 

This paper is intended to thoroughly investigate futures premiums in Australian electricity markets.   

Originality:  

This paper is the first comprehensive study to investigate futures premiums in Australian electricity markets.

Key literature / theoretical perspective: 

Due to the non-storability of electricity and the extremely volatile behaviour of electricity spot prices, market participants hedge their risks by buying or selling electricity in the forward market.  The ex-post futures premium as the relationship between quoted futures and realized spot prices provides important information on the risk-aversion of market participants.  

Design/methodology/approach:   

We examine the magnitude of futures premiums at different time instances. We relate the observed futures premiums to the behaviour of electricity spot prices. 

Findings: 

We find economically and statistically significant positive ex-post futures premium for futures contracts. We find that the bias in the futures price increases (decreases) when the last period average spot price increases (decreases).    

Research limitations/implications:

Dynamics and the dependence structure between the observed risk premiums should be analysed more deeply. 

Practical and Social implications:

  • Buyers and retailers of electricity are risk averse.
  • Risk premiums are significantly related across regional markets.  

Keywords: 

Electricity Markets, Spot and Futures Prices, Risk Premium, Australian Regional Markets