The Effect of Electricity Forward Contracts Trading in the Energy Exchange on the Volatility of Spot Prices in Iran Electricity Market

Abstract

Iran Energy Exchange started to work on 03/09/2013. Electricity trading is carried out within the framework of forward contracts in this exchange. This paper examines the impact of trading in the electricity forward market on the volatility of electricity spot market. Using daily data of electricity market prices between 03/21/2011 to 06/21/2015, we employed GARCH technique to investigate the impact of forward trading on the volatility of the spot market in Iran. Our two main findings are as follows: (1) forward trading has led to increased volatility in Iran electricity spot market, (2) there is an increase in sensitivity to new information while sensitivity to historical information decreases after introduction of the electricity forward contracts.

Keywords

• electricity spot market
• forward trading
• price volatility