Journal of Energy Markets

Derek W. Bunn
London Business School

The energy transition toward decarbonization has brought with it remarkable changes, particularly in the electricity sector. In this context, the first two papers in this issue of The Journal of Energy Markets look at renewable electricity production from the perspectives of generation planning and price forecasting. The issue’s third paper looks at a particular electricity market in which renewable facilities have become substantial. This analysis leads to questions regarding the resulting inefficiency of the day-ahead and real-time markets – something that could be partly remedied by improved renewable energy production forecasts.

In the first paper in the issue, “A multivariate model for hybrid wind–photovoltaic power production with energy portfolio optimization”, Laura Casula, Guglielmo D’Amico, Giovanni Masala and Filippo Petroni observe that, with the generation of renewable energy destined to grow further, hybrid production plants exploiting different weather sources have become particularly attractive. They analyze a mixed wind–photovoltaic system by means of a multivariate statistical model to evaluate the profitability of the system. In addition, they investigate the optimal portfolio via Markowitz’s classic theory. This analysis was enriched by taking into consideration the loss of load in the efficient portfolios. The paper’s models were validated via Monte Carlo simulations using empirical data.

In the issue’s second paper, “Measuring the effect of corrective short-term updates for wind energy forecasts on intraday electricity prices” by David Schönheit, Lasse Homann, Dominik Möst and Sjur Westgaard, the focus is on the uncertainties in power generation due to the weather dependency of renewable energy sources. The authors’ analysis quantifies how updates in predicted wind energy affect intraday electricity prices. It outlines the merit-order theory and derives hypotheses, testing them by means of regression analyses. Wind-speed-based wind energy forecasts are computed to obtain forecasts at two points in time before the time of delivery. The difference in these two forecasts reveals the short-term updates. The authors find that wind energy updates negatively affect intraday prices. The magnitude of the effect differs depending on the position within the merit order, and as a consequence different risk assessments are necessary. This result has subtle risk management implications to account for the magnitude of price uncertainties due to (updates to) wind energy production forecasts.

Finally, in our third paper, “Energy trading efficiency in ERCOT’s day-ahead and real-time electricity markets”, K. H. Cao, H. S. Qi, C. H. Tsai, C. K. Woo and J. Zarnikau question the impact of renewables on the efficient market hypothesis (EMH). The EMH for intertemporal trading of a commodity implies that today’s futures price is an unbiased predictor of a future delivery period’s spot price, and that the difference between today’s futures and spot prices reflects the commodity’s cost of carrying. The EMH for inter-regional trading therefore requires the commodity’s regional price difference to equal the inter-regional transportation cost. Using regional hourly data for January 1, 2011 to December 31, 2020 from the Electric Reliability Council of Texas (ERCOT), the authors investigate whether the EMH is empirically valid in all ERCOT’s wholesale electricity markets and, if not, the extent of ERCOT’s energy trading inefficiency and what can be done to reduce it. By estimating a parsimonious system of eight price-level regressions and four price-difference regressions, they rejected the interday EMH for all regions and the inter-regional EMH for all regional market pairs. These empirical examples have two policy implications: enhancing ERCOT’s interday trading efficiency would entail improving the day-ahead forecasts for solar and wind generation to refine ERCOT’s indicative real-time market prices; and enhancing ERCOT’s inter-regional trading efficiency would require transmission capacity expansion to reduce transmission congestion and line losses.