Informational efficiency on the nordic electricity market — The case of European price area differentials (EPAD)

Abstract

This paper empirically studies the informational efficiency of price discovery process of area price risk realized on the Nordic electricity spot and futures markets. The financial contracts enabling risk management of basis/area risk are called electricity price area differentials (EPAD). We study how the underlying commodity, area price difference (area price minus system price), reacts to new information on spot (Elspot) and futures (Nasdaq OMX) markets. We evaluate what are the short-run and long-run dynamics between the two markets, and whether either of the two is more informationally efficient. The results provide electricity market stakeholders with implications on whether EPAD contracts provide adequate and valid pricing signals for the underling area price risk.