This chapter illustrates a practical and effective algorithm to build an electricity forward curve (EFC) with daily granularity compatible with market quotes stemming from exchange-traded as well as over-the-counter (OTC) quotations. It briefly reviews the literature in the field, focusing on the elements lacking in existing methodologies for the purpose of accomplishing the task in hand. The chapter introduces the energy markets, focusing on the electricity segment, and describes the mechanics of electricity forward contracts. It delves into the core of the subject by explaining how to estimate a periodical price component and convey this piece of information into a quantitative assessment of a term structure forward price with daily granularity. EFCs are particularly useful for marking to market a standing portfolio of electricity-related positions of an industrial company or financial institution. The method of Benth et al. is described briefly in the chapter.
CALDANA, R., FUSAI, G. and RONCORONI, A. (2015). How to Build Electricity Forward Curves. In: Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management. 1st ed. Wiley, pp. 673-685.