Price discovery in the Nordic electricity market

Sammanfattning

This thesis explores the relationship between yearly electricity futures and spot prices in the Nordic electricity market, focusing on how yearly futures contracts contribute to price discovery. In light of recent shifts in market dynamics, such as increased price volatility and the growing share of variable renewable energy (VRE), understanding the informational role of longer-maturity futures is of particular interest. Using historical data from Nord Pool and Nasdaq Commodities between 2020 and 2024,the study applies time series methods, including cointegration analysis and a Vector Error Correction Model (VECM), to examine how futures and spot markets interact. Two established price discovery measures, Information Share (IS) and Component Share (CS), are used to evaluate the respective contributions of each market. Acomplementary analysis compares futures prices with realized spot outcomes to assess how expectations develop over time. The results highlight the complexity of price discovery in electricity markets with high volatility and conclude that futures tend to follow current spot prices rather than future expectations. Yearly futures can be an effective hedging tool, yet there is no indication that they reliably predict future spotprices.