Modelling electricity forward price curves

We present and analyze a method for constructing continuous forward price curves in electricity markets. Because a limited number of forward or futures contracts are traded in the market, only a limited picture of the forward price curve (term structure) is available. Furthermore one can question the quality of existing market price data due to the youth and lack of liquidity that characterize most electricity markets. Our method combines the information contained in observed bid and ask prices with information from scenarios generated by bottom-up models. Points on the forward price curve are generated via a non-linear program. As an example we use information concerning the shape of the seasonal variation found using a bottom-up model of the Nordic system. Finally the ability to capture shape of the seasonal variation is illustrated using historical prices from the Nordic electricity market.