Energy trading efficiency in ERCOT’s day-ahead and real-time electricity markets

Kang Hua CAO, Han QI, Chen-Hao TSAI, Chi Keung WOO, Jay ZARNIKAU

Research output: Contribution to journalArticlespeer-review

1 Citation (Scopus)

Abstract

The efficient market hypothesis (EMH) is a fundamental tenet of active and unfettered market trading. The EMH for intertemporal trading of a commodity such as natural gas implies that today’s futures price is an unbiased predictor of a future delivery period’s spot price and that the difference between today’s futures and spot prices reflects the commodity’s cost of carrying. The EMH for inter-regional trading requires the commodity’s regional price difference to equal the inter-regional transportation cost. Using regional hourly data for January 1, 2011 to December 31, 2020 from the Electric Reliability Council of Texas (ERCOT), we investigate whether the EMH is empirically valid in all ERCOT’s wholesale electricity markets and, if not, the extent of ERCOT’s energy trading inefficiency and what can be done to reduce it. By estimating a parsimonious system of eight price-level regressions and four price-difference regressions, we reject the interday EMH for all regions and the inter-regional EMH for all regional market pairs. However, ERCOT’s extent of trading inefficiency is mild when compared to the wholesale energy prices. Our empirical examples have two policy implications: enhancing ERCOT’s interday trading efficiency entails improving the day-ahead forecasts for solar and wind generation and refining ERCOT’s indicative real-time market prices, while enhancing ERCOT’s inter-regional trading efficiency requires transmission capacity expansion to reduce transmission congestion and line losses. Copyright © 2022 Incisive Risk Information (IP) Limited.
Original languageEnglish
Pages (from-to)59-81
JournalJournal of Energy Markets
Volume15
Issue number3
Early online date15 Nov 2022
DOIs
Publication statusPublished - 2022

Citation

Cao, K. H., Qi, H. S., Tsai, C. H., Woo, C. K., & Zarnikau, J. (2022). Energy trading efficiency in ERCOT’s day-ahead and real-time electricity markets. Journal of Energy Markets, 15(3), 59-81. doi: 10.21314/JEM.2022.017

Keywords

  • Wholesale electricity market
  • Efficient market hypothesis (EMH)
  • Energy trading efficiency
  • Price-level regressions
  • Price-difference regressions
  • Electric Reliability Council of Texas (ERCOT)

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