Fundamental Insights from Power Futures Prices

Transformations are prevailing phenomena in the energy market. In the 1990’s the electricity market transitioned from regulated to liberalized markets, which was initiated by the objective of the European Union to create one single European electricity market. By deregulation, ending monopolies and inefficiencies one of the desired results was to lower the prices for end-users, while giving the European Union a competitive position regarding electricity for the future. In the course of deregulation, markets for financial contracts on electricity emerged and electricity became a tradable asset. Electricity was traded on the power exchanges by the new players, who appeared in the restructured electricity market: the producers, the retailers and the end-users. The publicly quoted market price in the deregulated electricity market is set by the free interaction between supply and demand. These power price determining components are subject to change, therefore new uncertainties are introduced to the market. Identifying fundamentals that influence the forward price formation is valuable for understanding and managing risk and as the quote above emphasises there is no compromise when it becomes to fundamentals.