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Electricity Pricing
Table 2: Amplitude of Average Spot-Forward Differentials, Since 2006
Q1 Q2 Q3 Q4
Spark Spread Max 16.09 9.36 11.83 16.86
Min -5.17 -6.28 -14.05 10.32
Clean Spark Spread Max 23.13 14.36 14.81 21.81
Min -6.04 -4.76 -10.89 12.03
Dark Spread Max 20.39 2.38 5.16 1.96
although there is a mean bias, i.e.
Min -34.16 -10.99 -19.51 -12.76
even if the market appears
Clean Dark Spread Max 12.13 -0.69 10.51 6.11
systematically to err in one
Min -20.83 -2.95 -13.01 -3.00
Source: Gaselys
direction rather than the other, it
does not naturally follow that
systematic trading strategies can be determined on
Figure 2: Spot-Forward Differential (Quarterly) Since 2006
the basis of this simple observation, if only
because at this stage there is no indication that
this error will be repeated in future or has a
mundane fundamental explanation.
An analysis of quarterly differentials clearly
shows a wide dispersion of values, characterised by
a large standard deviation (Table 2 & Figure 2). The
errors over the quarters are far from systematic in
terms of direction or value. And apart from the
spark and clean spark spreads in Q4 and the clean
dark spread in Q2, the market was just as likely to
overestimate as underestimate the actual spot
spreads on the various maturity dates. On closer
examination, the largest errors relate to the end of
2006 and the beginning of 2007, when climate
Source: Gaselys
conditions were markedly different from normal.
Moreover, the errors in the dark and spark spreads
Table 3: Differential: Final Forward Quotation & Actual Spot Spread
do not appear to be co-ordinated:
theyareinoppositedirectionsinfive
Spot Prices Last Forward Price Spread – Spot/Last
quarters out of 12.
Average St. Dev. Average St. Dev. Average St. Dev.
Although it may be possible to
Spark Spread 10.13 6.92 10.42 7.39 -0.29 10.25 find fundamental reasons specific to
Clean Spark Spread 4.22 7.47 3.84 7.79 0.38 10.00 each situation to justify the
Dark Spread 23.62 11.56 29.44 12.00 -5.81 10.62 observed differentials, particularly
Clean Dark Spread 10.75 9.68 15.86 8.89 -5.11 9.24 the trend in the relative
Source: Gaselys
competitiveness of gas and coal for
power generation, there too there is
Average Differentials Between Spot no evidence of any clear repetitive pattern in market
& Forward Margins behaviour liable to lead to any systematic trading approach
The second observation to be made with regard to the over the various quarters. The observation made previously is
average margins recorded during the period from 2006 to however confirmed: in 75% of the quarters, the average
2008 (Table 1 & Figure 1) is that in the last three years the forward spark and clean spark spreads turned out lower than
forward market has clearly tended on average to overestimate the actual spot spreads, while in the case of dark spreads the
the spot margins that would actually be recorded on coal-fired opposite was found in 60% of cases.
plants by around €3-6/MWh and to underestimate those on
combined cycle gas plants by around €6-8/MWh. Without Final Forward Quotation & Actual Spot Spread
going any further for the moment, it therefore appears that The previous results tend to show that the forward market
the forward market is, on average, poor at anticipating the does not correctly value the level of the actual spreads which
fundamental situation that will arise in the spot market. In its will be recorded in the spot market. However, these are average
defence, in view of the spot electricity market’s sensitivity to results of forward quotations. This forward estimate, reflecting
unforeseen climate or technical events, it would be fairly the expectations of the various market participants, evolves
presumptuous to claim an ability to do better. However, substantially over the 12 months prior to the delivery period in
56 worldPower 2009
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