Are Electricity Risk Premia Affected by Emission Allowance Prices? Evidence from the EEX, Nord Pool and Powernext

Energy Policy, Vol. 37, No. 7, pp. 2594-2604, 2009

29 Pages Posted: 28 Jan 2008 Last revised: 16 Sep 2009

See all articles by George Daskalakis

George Daskalakis

MBS College of Business and Entrepreneurship

Raphael N. Markellos

University of East Anglia (UEA) - Norwich Business School

Date Written: February 10, 2009

Abstract

The links between emission and energy markets are of great interest to practitioners, academics and policy makers. In this paper, it is conjectured that a positive relationship exists between emission allowance spot returns and electricity risk premia within the European Union Emissions Trading Scheme (EU ETS). We discuss how this can be justified on the basis of the substantial uncertainties in the carbon markets. We also argue that this link could be due to trading strategies followed by electricity producers who attempt to exploit their initial allocation of free allowances. Analysis of data from three major markets, the EEX, Nord Pool and Powernext, offers empirical support to our conjecture. These findings have significant policy implications since they imply that efforts should be made in order to reduce the uncertainty in the carbon markets by clearly defining the EU ETS regulative framework and design over the next years. Moreover, our results suggest that the allocation of free allowances and their unrestricted trading enable electricity producers to accomplish windfall profits in the derivatives market at the expense of other market participants.

Keywords: Electricity, Risk Premium, Emission Allowances

JEL Classification: C12, G10, Q4, Q50

Suggested Citation

Daskalakis, George and Markellos, Raphael N., Are Electricity Risk Premia Affected by Emission Allowance Prices? Evidence from the EEX, Nord Pool and Powernext (February 10, 2009). Energy Policy, Vol. 37, No. 7, pp. 2594-2604, 2009, Available at SSRN: https://ssrn.com/abstract=1088017

George Daskalakis

MBS College of Business and Entrepreneurship ( email )

Saudi Arabia

Raphael N. Markellos (Contact Author)

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

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