Constructing forward price curves in electricity markets

We present and analyze a method for constructing approximated 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 theoretical continuous forward price curve is available to the analyst. Our method combines the information contained in observed bid and ask prices with information from forecasts generated by bottom-up models. As an example we use information concerning the shape of the seasonal variation from a bottom-up model to improve the forward price curve quoted on the Nordic power exchange.