Can Forward Commodity Markets Improve Short-Term Market Performance? Evidence from Wholesale Electricity

Working Paper

Published By

Program on Energy and Sustainable Development, page(s): 80

September 8, 2019

fsi logo vertical rgb

Economists traditionally argue that forward commodity markets allow more effi- cient risk-sharing and information aggregation. However, there is little empirical evidence that commodity markets provide economic benefits to producers and con- sumers of the commodity. This paper demonstrates that the introduction of finan- cial trading to California’s electricity market on February 1st, 2011 improved price discovery and lowered production costs. Specifically, we document that the aver- age, standard deviation and maximum of the differences between day-ahead and real-time electricity prices across California fell after 2/1/2011. Moreover, variable input costs (input energy) per MWh fell by 3% (4%) in high demand hours after 2/1/2011.

Publication Materials
Complete Paper Download pdf

Share This Publication