How Big Is the Risk Premium in an Electricity Forward Price? Evidence from the Pacific Northwest

The numerous benefits of electricity forward trading come at a cost to consumers when a forward price contains a risk premium. An analysis based on the theory of cross hedging suggests that there is a risk premium of about 5 percent in the forward price for delivery at the Mid-Columbia hub of the Pacific Northwest. The existence of a relatively large risk premium suggests that forward contract buyers are more risk-averse than sellers.