Essays on Energy Pricing

Date

2018-12

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Abstract

This dissertation consists of three essays on energy pricing. In the first essay, I estimate ex ante risk premia for PJM and MISO electricity markets. The ex ante measure of risk premia uses ex ante forecast of expected electricity spot price which is not obscured by the noise present in the realized electricity prices. To obtain this ex ante forecast of price, the electricity supply curve and the density of load forecast errors are calculated. Ex ante risk premium is the difference between this expectation and the traded day-ahead price. The results suggest that the lowest ex ante expected risk premia occur early in the morning and tend to increase during busy late afternoon/evening hours. The existence of risk premium over the horizon of just one day suggests that the power market is not fully integrated with the broader financial markets. The objective of the second essay is to determine whether there are economic linkages between PJM, MISO, NYISO, and ERCOT electricity markets. Significant cointegration is found for all market pairs. Principal Component analysis (PCA) and Seemingly Unrelated Regressions (SUR) analysis also suggest commonality across the risk premia. Moreover, the essay discusses the determinants of the risk premia in the electricity markets and compares the performance of ex post and ex ante measures. The results suggest that ex ante measure has a higher ability to explain time series variation not only relative to electricity, but also compared to other research on risk premia. The third essay analyzes the relationship between oil and gas prices to address the pricing of the liquefied natural gas (LNG) contracts. The findings show that LNG contracts should shift away from the prevailing oil-based pricing norm to contracts with gas-linked pricing terms instead. The results suggest that pricing LNG contracts based on oil leads to misalignment of price and value. Moreover, the essay investigates the relationships between and within global oil, coal and gas markets. The findings show that oil prices are closely related to each other. This is true for coal prices as well, but to a lesser extent. Finally, the results suggest that although, distant gas markets remain relatively isolated, the increase in global LNG trade will produce stronger linkages between gas prices.

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Keywords

Electricity markets, Risk Premia, Liquefied natural gas (LNG), Commodity Markets

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