Introduction
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Transcript of Introduction
Copyright Houmoller Consulting ©Anders Plejdrup Houmøller 1Jan. 3, 2013
Introduction In Appendix 1, you’ll find slides giving examples of how
the closing/settlement prices for financial contracts can change during the contracts’ trading period.
In appendix 2, you’ll find a list of the terms and acronyms used in this presentation.
Concerning the documents referred to in this presentation: At houmollerconsulting.dk, you can download the
documents from the sub-page Facts and findings. This PowerPoint presentation is animated
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Copyright Houmoller Consulting ©Anders Plejdrup Houmøller 2Jan. 3, 2013
Forward prices and spot prices – 1
This PowerPoint presentation compares the spot prices and the prices of the financial forward contracts The comparison is made for the German Phelix spot
price, the Nordic System price and the spot prices for the price zones of Southern Sweden (SE4), Western Denmark (DK1) and Eastern Denmark (DK2).
In this presentation, for Southern Sweden, Western Denmark and Eastern Denmark, the ”forward price” is the price of the System Price contract plus the price of the CfD contract: (Forward price) = (System Price) + (CfD price).
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Conclusion from the analysis:price hedging is expensive for consumers As can be seen: compared with the spot prices, the
forward prices have a strong tendency to overshootHence, in the choice between spot and forward,
on the average you get the highest prices by choosing forward.
Consequently, on the average, price hedging is expensive for consumers (and profitable for producers).
For both Germany and Western Denmark, the tendency for the quarterly forward prices to overshoot the spot prices is statistically significant With only 28 observations in each of the samples, its
remarkable its possible to prove statistical significance for some price zones.
3
*) For both Germany and Western Denmark,the significance level is higher than 0.995%
*)
The concept ”price hedging”is explained in appendix 2
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Correlation between forward prices and spot prices
Note that high liquidity for a forward contract does not imply strong correlation between the contract’s prices and the corresponding spot prices.
Probably, the Nordic System Price contracts are Europe’s most liquid financial electricity contractsAt the same time, the prices of the System Price
contracts have low correlation to the spot prices.
Jan. 3, 2013 Anders Plejdrup Houmøller
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Forward prices and spot prices – 2 For each of the slides no. 7-11: For each quarter, “the quarter’s forward price” is
the average of the daily closing/settlement prices during the reference periodThe reference period is the trading days during
the last quarter, where the contract was traded (save the last ten trading days).
Example for the Nordic System Price contract for Q3-2012 (ENOQ3-12):The “forward price” is the average of the daily
closing prices during the period from 2 April to 15 June 2012• As can be seen from slide no. 18, this gives a
forward price of 29.84 EUR/MWh.Anders Plejdrup Houmøller
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Forward prices and spot prices – 3 For each of the slides no. 7-9 and slide no. 11: For each of the 28 quarters from Q1-2006 to Q4-2012, the
quarter’s average spot prices is compared with the quarter’s forward price.
For each slide, this gives 28 points indicating how well the forward’s price forecasted the spot price.
The mean of the numerical difference |spot–forward| illustrates the average distance between the forward curve and the spot curve.
The mean of the difference (spot–forward) shows how far the spot curve on the average lies below the forward curve.
For slide no. 10: the price zone SE4 was launched 1 November 2011. Therefore, the analysis covers only the four quarters of 2012.
Anders Plejdrup Houmøller
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Germany: forward prices and spot pricesThe 28 quarters from Q1-2006 to Q4-2012
20
30
40
50
60
70
80
90EUR/MWh
2006 2007 2008 2009 2010 2011 2012
Correlation(spot,forward) = 0.52
Average of (spot - forward) = -6.0 EUR/MWhAverage of |spot – forward| = 9.8 EUR/MWh
The quarter’sforward price
Thequarter’saverage
spot price
7Source: EEX
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Western Denmark: forward prices and spot prices
2006 2007 2008 2009 2010 2011 2012
The 28 quarters from Q1-2006 to Q4-2012
The quarter’sforward price
Thequarter’saverage
spot price
Correlation(spot,forward) = 0.52
Average of (spot - forward) = -6.8 EUR/MWhAverage of |spot – forward| = 8.8 EUR/MWh
20
30
40
50
60
70
80
EUR/MWh
8Sources: Nasdaq OMX and Nord Pool Spot
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Eastern Denmark: forward prices and spot prices
2006 2007 2008 2009 2010 2011 201220
30
40
50
60
70
80
EUR/MWh The 28 quarters from Q1-2006 to Q4-2012
The quarter’sforward price
Thequarter’saverage
spot priceAverage of (spot - forward) = -5.6 EUR/MWh
Average of |spot – forward| = 11.0 EUR/MWh
Correlation(spot,forward) = 0.35
9Sources: Nasdaq OMX and Nord Pool Spot
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Southern Sweden: forward prices and spot prices
20
30
40
50
60EUR/MWh The 4 quarters from Q1-2012 to Q4-2012
2012Q1 Q2 Q3 Q4
The quarter’sforward price
Thequarter’saverage
spot price
Average of (spot - forward) = -10.4 EUR/MWh
10Sources: Nasdaq OMX and Nord Pool Spot
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System Price: forward prices and spot prices
2006 2007 2008 2009 2010 2011 201210
20
30
40
50
60
70EUR/MWh The 28 quarters from Q1-2006 to Q4-2012
The quarter’sforward price
Thequarter’saverage
spot price
Correlation(spot,forward) = 0.49
Average of (spot - forward) = -3.5 EUR/MWhAverage of |spot – forward| = 9.5 EUR/MWh
11Sources: Nasdaq OMX and Nord Pool Spot
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Appendix 1Closing/settlement pricesVariation during the last nine months
of the financial contract’s trading period
Anders Plejdrup Houmøller
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Closing/Settlement Prices Please refer to appendix 2: at the end of each trading day, both
Nasdaq OMX and EEX set a closing/settlement price for each of their financial contacts.
As examples of how the closing/settlement prices vary: The slides no. 14-18 show the daily closing/settlement prices for
five forwards. For each forward, the daily closing/settlement price is shown during
the last nine months, where the forward was traded. The four Nordic forwards hedged against the Q3-2012 spot price for
respectively Western Denmark (DK1). Eastern Denmark (DK2). Southern Sweden (SE4). The Nordic System Price.
The German forward hedged against the German Q4-2012 spot price.
“Reference period” is the trading days during the last quarter, where the contract was traded (save the last 10 trading days).
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Germany: Q4-2012
0
10
20
30
40
50
60EUR/MWh Forward prices and the quarter’s average spot price
Trading days in 2012
Settlement price per day forPhelix Baseload Quarter 4/12
14Source: EEX
The average German spot price for Q4-2012turned out to be 41.38 EUR/MWh
Reference period’s average forward price: 50.15 EUR/MWh
Jan Feb Mar Apr May Jun Jul Aug Sept
Reference period
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Western Denmark (DK1): Q3-2012
0
10
20
30
40
50EUR/MWh
15Sources: Nasdaq OMX and Nord Pool Spot
Forward prices and the quarter’s average spot price
Trading days in 2011-2012
Closing price per day forENOQ3-12 + SYARHQ3-12
The average DK1 spot price for Q3-2012turned out to be 33.95 EUR/MWh
Reference period’s average forward price: 39.55 EUR/MWh
Oct Nov Dec Jan Feb Mar Apr May JunReference period
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Eastern Denmark (DK2): Q3-2012
0
10
20
30
40
50EUR/MWh
16Sources: Nasdaq OMX and Nord Pool Spot
Forward prices and the quarter’s average spot price
Trading days in 2011-2012
Closing price per day forENOQ3-12 + SYCHPQ3-12
Reference period’s average forward price: 39.79 EUR/MWh
The average DK2 spot price for Q3-2012turned out to be 35.39 EUR/MWh
Oct Nov Dec Jan Feb Mar Apr May JunReference period
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Southern Sweden (SE4): Q3-2012
0
10
20
30
40
50EUR/MWh
17Sources: Nasdaq OMX and Nord Pool Spot
Forward prices and the quarter’s average spot price
Trading days in 2011-2012
Closing price per day forENOQ3-12 + SYMALQ3-12
Reference period’s average forward price: 35.82 EUR/MWh
The average SE4 spot price for Q3-2012turned out to be 25.68 EUR/MWh
Oct Nov Dec Jan Feb Mar Apr May JunReference period
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System Price: Q3-2012
05
1015202530354045EUR/MWh
18Sources: Nasdaq OMX and Nord Pool Spot
Forward prices and the quarter’s average spot price
Trading days in 2011-2012Oct Nov Dec Jan Feb Mar Apr May Jun
Closing price per day forENOQ3-12
Reference period
The average System Price for Q3-2012turned out to be 20.84 EUR/MWh
Reference period’s average forward price: 29.84 EUR/MWh
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Appendix 2Terminology and acronyms
Anders Plejdrup Houmøller
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Terminology and acronyms – 1As used in this presentation
CfD Contract for Difference. A financial contract, which hedges against the risk there is a difference between the System Price and the spot price of a given Nordic price zone.Example: the underlying reference for the CfD for DK1 is this difference
(DK1 spot price) - (System Price). Closing price At Nasdaq OMX, for each financial contract, a
closing price is set at the end of every trading day. In effect, at the end of the trading day, the closing price is the financial market’s forecast of the future spot price.Nasdaq OMX’ closing price is analogous with EEX’ settlement price.Example: 27.45 EUR/MWh was the closing price 15 June 2012 for the contract hedging against the System Price during Q3-2012 (ENOQ3-12).
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Terminology and acronyms – 2As used in this presentation
Correlation Given two data sets, the correlation function measures the degree to which the two data sets move in lockstep. Please refer to the next-to-last slide.
DK1 and DK2 The price zones of Western and Eastern Denmark as indicated at the picture.
Eastern Denmark See DK2. EEX European Energy Exchange. Please refer to the web site
eex.de. ENOQ3-12 See ticker symbol. Financial contract Short-term for financial forward contract.
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Terminology and acronyms – 3As used in this presentation
Financial forward contract In this document, this is a contract, which can be used to hedge against a spot price. Please refer to the chapters 11-13 of the PDF document “The Liberalized Electricity Market”.
Forward contract Short-term for financial forward contract. Forward price The settlement/closing price of a forward
contract. German spot price See Phelix spot price. Nasdaq OMX An exchange, where the players can trade Nordic
financial contracts (and other contracts). Please refer to the web site nasdaqomx.com/commodities.
Nordic and Nordic area In this document, this refers to the four countries Denmark, Finland, Norway and Sweden.
Nordic System Price See System Price.
22Anders Plejdrup HoumøllerJan. 3, 2013
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Terminology and acronyms – 4As used in this presentation
Phelix Baseload 4/12 The EEX forward, which hedged against the German spot price during Q4-2012.
Phelix spot price The spot price for Germany published by the spot exchange EPEX Spot.
Price hedging As a consumer or producer of electricity in Northern Europe: if you choose to trade at the spot price, you’ll first learn your price for the next day’s consumption/production of electricity after 12 o’clock Central European Time.However, by using a financial contract, you can fix your electricity price at an earlier point in time. This early fixing of the price is called “price hedging”.
Price zone A geographical area, within which the players can trade electrical energy day-ahead without considering grid bottlenecks.
23Jan. 3, 2013 Anders Plejdrup Houmøller
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Terminology and acronyms – 5As used in this presentation
SE4 The price zone of Southern Sweden as indicated at the picture at slide no. 21.
Settlement price At EEX, for each financial contract, a settlement price is set at the end of every trading day. In effect, at the end of the trading day, the settlement price is the financial market’s forecast of the future spot price.EEX’s settlement price is analogous with Nasdaq OMX’s closing price.
Southern Sweden See SE4. Spot price Please refer to appendix 2 in the PowerPoint
presentation “Market coupling and spot price calculation” (or the PDF document with the same name).
24Jan. 3, 2013 Anders Plejdrup Houmøller
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Terminology and acronyms – 6As used in this presentation
SYARHQ3-12 See ticker symbol. SYCHPQ3-12 ticker symbol of the CfD, which hedged against
the difference between the DK2 spot price and the System Price during Q3-2012. CPH indicates CoPenHagen.
SYMALQ3-12 ticker symbol of the CfD, which hedged against the difference between the SE4 spot price and the System Price during Q3-2012. MAL indicates MALmø (the biggest town in SE4).
System Price A virtual price. It’s the theoretical, common spot price we would have in the Nordic area, if there were no grid bottlenecks in the area covered by the four countries.For an overview over the historical numerical values of the System Price, please see the PowerPoint presentation “System Price 1992-2012” (or the PDF document with the same name).
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Terminology and acronyms – 7As used in this presentation
Ticker symbol The name of a financial contract.Example 1: the ticker symbol of the contract, which hedged against the System Price during Q3-2012 was ENOQ3-12
• ENO indicates Electricity NOrdic• Q3-12 indicates the third quarter of 2012.
Example 2: the ticker symbol of the CfD, which hedged against the difference between the DK1 spot price and the System Price during Q3-2012 was SYARHQ3-12
• SY indicates SYstem Price• ARH indicates AARHus (the biggest town in Western
Denmark).• Q3-12 indicates the third quarter of 2012.
Western Denmark See DK1.
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The correlation function The correlation function measures the correlation
between two variables. If the two variables move in lockstep, the value of
the correlation function is 1.A value of 0 means there is no correlation at all.
a
b
In this exampleCorrelation(a,b) = 1as a and b movein lockstep
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Thank you for your attention!
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Anders Plejdrup HoumøllerHoumoller Consulting ApS
Tel. +45 28 11 23 [email protected]
Web houmollerconsulting.dk