The Operational Risks of Electricity Futures Based on Non-Storability of Electric Power

Electricity futures emerged in 1990s, and it was expected to bring electricity market efficiency and stability. However, the practice on electricity futures show that it can not efficiently prevent the fluctuation of market price, and eve the electricity futures market may go to collapse. Up to now, none of literatures clears the question. This paper gives the causes that lead up to the failure of electricity futures market by analyzing the internal interaction mechanism between electricity futures price and spot prices. First, electric power is not economically storable, as a result electricity futures exchange can not at all make an influence to electricity spot prices through inventory change; second, traders always modify the quotation on the basis of expectation about the state of electricity market in the future, so the expectation plays an important role for the prices of futures contracts. The paper concludes that the failure of electricity futures market can fundamentally be attribute to two reason: (1) non-storage of electric power, i.e. that electricity futures market inevitably goes to collapse if only the electricity can not be stored economically; (2) the instability of expectation, which will directly cause the fluctuation of prices in electricity market.