The relationship between day-ahead and future prices in electricity markets: An empirical analysis on Italy, France, Germany, and Switzerland

We evaluate the relationship between electricity day-ahead and future prices following the hedging pressure theory, which explains the difference between future prices and expected spot prices regarding market players' risk aversion. We calculate the sign and intensity of the ex-post risk premia in the electricity market of Italy, France, Switzerland, and Germany during the last decade and for all products traded: monthly, quarterly, and yearly futures and distinguish between base-load and peak-price futures. We test the impact of the trading period on the risk premia in panel regressions, controlling for seasonality and the impact of financial markets' trades and primary energy prices. We show that, in all countries, there is no convergence of future prices to the underlying day-ahead ones; moreover, for most future contracts, the premium rises as contracts approach delivery. In addition, for Italy and Switzerland, there is an inversion of the sign of the premia (mostly for base load products). Risk premia are negative at the beginning of the trading period and positive as the delivery period approaches. This indicates that, in these countries, premia are, on average, paid by power producers at the beginning of the period and by suppliers (i.e. power buyers) close to delivery. In contrast, in France and Germany, risk premia are both positive at the beginning and at the end of the trading period, signalling that, on average, buyers are willing to pay a premium to cover price volatility.

Automated summary

This study evaluates the risk premia in the electricity markets of Italy, France, Switzerland, and Germany by applying the hedging pressure theory. The findings suggest that future prices do not converge to the underlying day-ahead prices in all countries. Additionally, the risk premia increase as contracts approach delivery, except for in Italy and Switzerland where there is an inversion of the sign. Risk premia are negative at the beginning and positive as the delivery period approaches in these two countries.