The Natural Number of Forward Markets for Electricity Discussion: Severin Borenstein UC Energy Institute and Haas School of Business, UC Berkeley

Fundamental and Elegant Central Idea of the Paper If two prices move closely together, may not need separate instruments to hedge these risks  Easy to see in a spatial context Delivery points for wheat More subtle application in the time context  If price of 24-month out electricity moves closely with price of 36-month out electricity, don’t need both contracts  BUT, unlike spatial application, the “wrong” contract may not be a good hedge all the way to delivery  May require multiple transactions to replicate the hedge

Modeling Electricity Prices Can’t do empirical estimation since the contracts don’t exist So, model a plausible price dynamic  Competitive markets  Fuel prices plus spark spread  Load shape assumptions Alternative could use more structural approach to industry equilibrium  Direct assumptions on technologies and inputs

Other Factors in Futures Market Success Density of Demand  Even small variation could support a contract if there is enough demand Transaction Costs of Changing Contracts  Difference between spatial and time application The Gold Futures Puzzle  Lock-step movement of futures contracts  Yet, contacts trade for many years out

Conclusion Forward contracts are very important for risk hedging in restructured electricity markets Many, including some sophisticated traders, went into restructuring without understanding how/where futures markets would develop This paper makes a valuable contribution to understanding development of futures Other factors need to be considered as well, which may help address remaining puzzles