An Equilibrium Pricing Model for Wind Power Futures

33 Pages Posted: 28 Aug 2016 Last revised: 15 May 2017

See all articles by Gerke Gersema

Gerke Gersema

Technische Universität München (TUM) - Center for Energy Markets (CEM)

David Wozabal

Technische Universität München (TUM) - TUM School of Management

Date Written: August 26, 2016

Abstract

Generation from wind power plants is intermittent and affects profits of wind power generators and conventional generators alike. Currently, generators have limited options for transferring the resulting wind-related volume risks. The European Energy Exchange (EEX) recently introduced exchange-traded wind power futures to address this market imperfection. We propose a stylized equilibrium pricing model featuring two representative agents and analyze equilibrium prices as well as the mechanics behind risk premia for wind power futures. We calibrate and simulate stochastic models for wind power generation, power prices, electricity demand, as well as other relevant sources of uncertainty and use the resulting scenarios to conduct a case study for the German market, analyzing prices, hedging effectiveness, and risk premia. Our main result suggests that wind generators are willing to pay an insurance premium to conventional generators to reduce their risks. We conduct a thorough sensitivity analysis to test the influence of model parameters and find that our results on risk premia hold for a broad range of reasonable inputs.

Keywords: Weather derivatives, Power futures, Market integration of renewables, Variable renewables, Wind power, Intermittency

JEL Classification: G130, L940, Q410, Q420, Q470

Suggested Citation

Gersema, Gerke and Wozabal, David, An Equilibrium Pricing Model for Wind Power Futures (August 26, 2016). Energy Economics 65 (2017) 64-74; DOI: 10.1016/j.eneco.2017.04.032, Available at SSRN: https://ssrn.com/abstract=2830574 or http://dx.doi.org/10.2139/ssrn.2830574

Gerke Gersema (Contact Author)

Technische Universität München (TUM) - Center for Energy Markets (CEM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

HOME PAGE: http://https://www.cem.wi.tum.de

David Wozabal

Technische Universität München (TUM) - TUM School of Management ( email )

München
Germany

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