Spot and Derivative Pricing in the EEX Power Market

Abstract

Using spot and futures price data from the German EEX Power market, we test the adequacy of various one-factor and two-factor models for electricity spot prices. The models are compared along two different dimensions: (1) We assess their ability to explain the major data characteristics and (2) the forecasting accuracy for expected future spot prices is analyzed. We find that the regime switching models clearly out-perform its competitors in almost all respects. The best results are obtained using a two-regime model with a Gaussian distribution in the spike regime. Furthermore, for short and medium-term periods our results underpin the frequently stated hy-pothesis that electricity futures quotes are consistently greater than the expected future spot, a situation which is denoted as contango.