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Renewable Energy and Equilibrium Hedging in Electricity Forward Markets

Referierte Aufsätze Web of Science

Sebastian Schwenen, Karsten Neuhoff

In: The Energy Journal (2024), im Ersch. [online first: 2024-06-03]


We study the impact of renewable energy on forward markets for electricity. Previous literature shows that forward prices are determined by time-varying demand and volatile spot prices. We introduce supply risk from renewable generation and find that stochastic renewable output mitigates income risk for generating firms, in particular when negative shocks to renewable output have large positive price impact. This risk off-setting effect leads to reduced hedging needs for generating companies and increases the forward premium. Using five years of high-frequency spot and futures market data, we confirm our model empirically. In sum, our findings suggest that intermittent renewable generation changes firm’s hedging incentives and has significant impact on forward prices for electricity.

Karsten Neuhoff

Head of Department in the Climate Policy Department

JEL-Classification: G11;G13;Q42
Keywords: risk mitigation, forward markets, electricity, renewable energy