Structural model for electricity forward prices

Structural models for forward electricity prices are of great relevance nowadays, given the major structural changes in the market due to the increase of renewable energy in the production mix. In this study, we aim at understanding the dynamics of the risk premium (the drift in the dynamics) and the noise (non-Gaussian, stochastic volatility) in futures prices for electricity. We firstly extract the information from smoothed price forward curves. Since electricity is largely non-storable, there is no cost-of-carry relationship linking spot and forward prices. We therefore fit our model directly to the current forward prices. The main innovation of our approach is that we aim at understanding the dynamics of risk premia and noise bi-dimensionally: in time, for one specific maturity, but also cross-section looking at the correlations in the noise between different points on the price forward curve.