Electricity Notes

grok:

“An Hourly Price Forward Curve (HPFC) is a high-resolution forward price curve specifically constructed for electricity markets, providing expected (or market-implied) electricity prices for each individual hour into the future — often from day-ahead out to several years ahead (commonly 3–5+ years).

It serves as one of the most important building blocks in modern power trading, origination, asset valuation, PPA pricing, battery/storage optimization, and risk management in deregulated electricity markets.

Why electricity needs something more granular than a “normal” forward curve

In most commodity markets (oil, gas, metals, agricultural products), forward prices are quoted for relatively large delivery periods:

• Months, quarters, or calendar years
• A single price often applies to the whole period

Electricity is fundamentally different because:

• It cannot be stored economically at scale (at least not until very large battery deployment in the 2020s)
• Supply and demand must balance every second
• Prices show extremely strong hourly, daily, weekly and seasonal patterns
• Negative prices, price spikes to thousands of €/MWh, and huge intra-day volatility are common

Standard futures contracts in Europe (EEX, Nasdaq, ICE, etc.) are typically settled on base-load (all hours), peak-load (e.g., 8–20 h), off-peak, or sometimes block products — but almost never on true hourly granularity far into the future.

→ The market gives you block-average prices for future delivery periods, but real-world exposure (load, renewables, storage, demand response) is almost always hourly-shaped.

The HPFC solves this by disaggregating / reshaping the observable futures prices into a synthetic hourly price series that:

• Exactly reproduces the market prices of all traded futures / forward products when you take the appropriate hourly averages
• Embeds realistic hourly seasonality patterns (intra-day shape, weekend vs weekday, summer vs winter shapes, etc.)
• Is usually arbitrage-free with respect to the observable market

Core components typically used to build an HPFC

Most commercial and proprietary HPFC construction methodologies combine:

1. Market prices of futures/forwards (the hard constraint — the curve must match these when averaged appropriately)
   • Yearly, quarterly, monthly, weekly base / peak contracts
2. Historical hourly spot price patterns (to extract typical intra-day, weekly, seasonal shapes)
3. Fundamental drivers / forecasts (in more sophisticated models)
   • Expected residual load
   • Renewable generation profiles (solar, wind)
   • Fuel & carbon prices
   • Outage schedules, hydro availability, cross-border flows, etc.
4. Mathematical reconciliation (optimization / calibration)
   • Often least-squares fitting, Bayesian-like blending, quadratic programming, or machine-learning-based calibration

The result is a long time series (e.g., ~44,000–50,000 hours for 5 years) of hourly prices that:

Shows realistic hourly variation driven by historical / fundamental patterns

Matches all observable futures prices perfectly (or within very tight tolerance)”