Electricity Pricing
Figure5: VariationsinForwardSpreadQuotations
Range:ForwardQuotations&
ActualSpotSpreads
It therefore appears that the forward market
fails to value spot margins correctly, both on
average and just before the delivery period.
However,theforwardmarketmayyetsavefaceby
showing itself able to anticipate the actual value
of spot spreads at least once. In other words, the
actual spot spread should be included within the
range of spreads quoted by the forward market in
the 12 months prior to the maturity date. But it
Source: Gaselys
must be admitted that in the historical series in
question the forward market failed to quote the ultimate spot does not appear to be very constant. That limits the use of
spread in around 25% of cases (Figures 3 & 4). Spot margins systematic trading strategies.
on gas-fired plants once again tended to be underestimated However, while there is a need to be mindful of the limited
here, whereas margins on coal-fired plants, with one statistical relevance of the results, a number of interesting
exception, were overestimated. Therefore, in spite of variation factors have nevertheless emerged. Apart from a somewhat
ranges of at least €10/MWh in forward spreads, the market anecdotal alternate positive and negative error in the
never anticipates certain situations. In its defence, with differential between the final forward spark spread and the
quarterly spot margins showing a actual spot spark spread, the main
v
€
ariation amplitude of around
... the forward market does
interest lies in the differences between
40/MWh for coal and €30/MWh for
not provide market
theaverageforwardandspotlevels.On
gas, the forecasting exercise is indeed
somewhat tricky.
participants ... with accurate
average over the three years reviewed,
the forward market tends to
Moreover, the forward market has indications of the underestimate the margins on gas-fired
progressively reduced the amplitude of
future spot situation
plants, whereas margins on coal-fired
itsforwardquotationsoverthelastthree plants tend to be overestimated. Hence
years (Figure 5), without any deterioration in its (mediocre) the forward market does not provide market participants –
predictive performance (Figure 2) even though the market still and particularly generators – with accurate indications of the
does not have a very good grasp of the future fundamental futurespotsituation.Theforwardmarketclearlyfavourscoal-
situation, the consensus seemed somewhat less volatile for fired generation over and above generation from combined
maturity dates in 2008. cycle gas plants.
Very conveniently for the incumbent operators, the bulk of
Conclusion:ForaPowerGenerator the thermal generating resources installed to meet baseload
... it is better to have a coal-fired plant for the forward demand comprise coal-fired plants ... whereas new entrants
market & to keep the gas-fired plant for spot invest more in gas-fired plants, which are faster and less
Electricity prices can be analysed by breaking them down expensive to bring online but are clearly undervalued by the
into a part associated with the markets in fuels (gas and coal, forward market.
CO
2
) and a part more specifically reflecting the physical Ultimately,themarket’sbehaviourmayseemfairlycoherent
balancebetweentheelectricitysupplyanddemand:sparkand in the light of the prevailing forces: even if the forward market
dark spreads. The rudimentary analysis carried out here for is poor at anticipating spot margins, its average error tends to
Germany, despite its many limitations – particularly the small benefit the incumbent generators. One might even consider
number of historical values and the fact that no account is that the market is not getting it so wrong after all; it is just
taken of trends in the relative competitiveness of coal and gas defending the interests of its main operators.
•
– has nevertheless shown that the forward market anticipates
thelevelofspotmarginswithasignificantdegreeoferror.That FranckSchuttelaar is Market Economist with
is not really surprising, moreover, given the sensitivity of Gaselys in Paris.
actual spot prices to unforeseen climate or technical events E:
franck.schuttelaar@gaselys.com
and the relative level of fuel prices. Unfortunately, this error
www.gaselys.com
worldPower2009 59
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