Analyzing Market Efficiency and Price Dynamics in the Nordic Electricity Futures Market

Abstract

This paper examines the relationship between monthly spot and futures prices in the Nord Pool electricity market, exploring long and short-term equilibrium dynamics. Using various models, including error correction models, we analyze futures contracts with holding periods from one to four months. Findings reveal an unbiased long-term relationship between spot and future prices, indicating a tendency toward market equilibrium. However, short-term biases are observed due to temporary shocks, market inefficiencies, or other factors affecting price dynamics. The analysis reveals no significant forward premium, indicating the absence of systematic mispricing. Factors impacting the forward premium include consumption deviations, wind production, and spot price variance. Seasonal variables have limited significance in forecasting spot price changes or explaining variations in the forward premium.