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Trading the short-term market – how well are the traders doing in the CWE and SEE markets?

Eylert Ellefsen
Archived blog post. This blog post has been transferred from our previous blogging platform. Links and images may not work as intended.

Traders’ bets on W+1 and M+1 reveal very similar risk premiums.

We have seen interesting price movements in the Central Western Europe (CWE) and South Eastern Europe (SEE) powermarkets at the start of 2021, but how well did traders position themselves in the week- and month-ahead contracts in these markets?

To better understand the risk premium in the two markets that best represent the CWE and SEE areas, Germany and Hungary, we have studied the deviation between the week-ahead contracts and the delivered spot prices in these two markets.

We have chosen to focus on the German market because it has the highest liquidity in Europe, a high share of renewables, and a high degree of volatility. Hungary and the SEE region are characterized by moderate liquidity, less transparency, but are fundamentally influenced by renewables as well.

Key findings

We observe similar levels of risk premium in the Germany and Hungary markets for W+1 and M+1 products over the past 13 months

  • There was a limited positive risk-premium/trading difference as an average for this period in both markets.
  • For Week-Ahead products, the average risk-premium has been about 0.2 €/MWh in both markets.
  • For Month-Ahead products, the average risk-premium has been about 1.2 €/MWh in both markets.

In this blog post, we’ll use week 4 as an example to illustrate our key findings.

Wk 4 – what does it tell us?

We consider observed spot prices and forecasted fundamentals as the main price drivers for W+1 and M+1. In this blog post, we are not focusing on the detailed developments of fundamentals, but make our assessments based on observed closing prices in week 4:

We see that closing prices varied by up to 20 €/MWh for both HU and DE, but the average variation for DE was much lower than for HU, which was largely overpriced in this example.

W+1 trading results week 1-2020 to week 4-2021

The fundamental uncertainty is obviously lower when trading W+1 than M+1, so we have looked at the deviation between W+1 and delivered spot prices for weeks 1-20 and 4-21, respectively. But with this analysis, we also wanted to see if there were any differences in quality between a liquid DE-market and a less liquid HU-market.

The estimates are based on the difference between the latest closing prices, normally on Fridays, and the delivered weekly spot price.

You can see the comparison Week Ahead and actual Spot in the charts below.

Statistics for the 57 weeks (week 1-2020 to week 4-2021) as plotted in the charts above.

We see from the statistics that the average differences between actual and closing price are very close to each other, but from the standard deviation value, we may conclude that the Hungarian market has been slightly better at predicting the spot-prices one week ahead. For both markets we see 2 weeks with differences in the deviation of 10 €/MWh or more, so also from this perspective, the two markets show very similar behaviour. This is partly because the markets are to some extent correlated to each other (ref. the HU-spot chart where the DE spot is included).

Hungary vs Germany

We have made a similar comparison for M+1 contracts for DE and HU for the same period as for W+1 contracts. We should expect larger deviations on M+1 than W+1 but by how much?

The answers are contained in the table below which show the actual spot and closing prices, separately for HU and DE.

Spot price (noted Actual)and closing prices for the corresponding month products (noted Closing), and the difference between them.

We observe that the deviation between the M+1 contract and the spot price is very similar for both markets, but the higher standard deviation indicates that the HU market is somewhat more volatile than the DE-market on a month's horizon.

This is is the case despite the higher share of intermittent renewable power supply in the German market, and the differences may be explained by lower liquidity and less transparency in the SEE markets.

On average, we see that the M+1 contract is traded 1.2 €/MWh above actual spot, which means a limited positive risk-premium in M+1 trading in both markets.

Thanks for reading.

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