Prospects for an electricity futures market - A comment

In a recent article in this journal tussing and hatcher (1994) have argued that the market for power sales will be unlikely to foster and sustain a viable futures market until significant policy changes are executed. They conclude that because of the market structure of electricity, dominated by vertically-integrated organizations, there is no need for futures contracts. In this article we show that the hedging effectiveness of electricity futures is high compared with traditional commodities such as crude oil. Introducing electricity futures will therefore change the market structure of the electricity business. Moreover, electricity futures can contribute to an efficient implementation of environmental policy.