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

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

September 8, 2019

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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.

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