Are electricity risk premia affected by emission allowance prices?:Evidence from the EEX, Nord Pool and Powernext

Daskalakis, G. ORCID: https://orcid.org/0000-0003-4421-7167 and Markellos, Raphael-Nicholas (2009) Are electricity risk premia affected by emission allowance prices?:Evidence from the EEX, Nord Pool and Powernext. Energy Policy, 37 (7). pp. 2594-2604.

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Abstract

The links between emission and energy markets are of great interest to practitioners, academics and policy makers. In this paper, it is conjectured that a positive relationship exists between emission allowance spot returns and electricity risk premia within the European Union Emissions Trading Scheme (EU ETS). We discuss how this can be justified on the basis of the substantial uncertainties in the carbon markets. We also argue that this link could be due to trading strategies followed by electricity producers who attempt to exploit their initial allocation of free allowances. Analysis of data from three major markets, the EEX, Nord Pool and Powernext, offers empirical support to our conjecture. These findings have significant policy implications since they imply that efforts should be made in order to reduce the uncertainty in the carbon markets by clearly defining the EU ETS regulative framework and design over the next years. Moreover, our results suggest that the allocation of free allowances and their unrestricted trading enable electricity producers to accomplish windfall profits in the derivatives market at the expense of other market participants.

Item Type:	Article
Uncontrolled Keywords:	electricity,emission allowances,risk premium
Faculty \ School:	Faculty of Social Sciences > Norwich Business School
UEA Research Groups:	Faculty of Social Sciences > Research Groups > Accounting, Finance and Governance (former - to 2017) Faculty of Social Sciences > Research Groups > Finance Group Faculty of Social Sciences > Research Centres > Centre for Competition Policy
Depositing User:	Vishal Gautam
Date Deposited:	13 Jan 2011 10:40
Last Modified:	21 Apr 2023 13:30
URI:	https://ueaeprints.uea.ac.uk/id/eprint/19253
DOI:	10.1016/j.enpol.2009.02.010

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