Energy trading efficiency in ERCOT’s day-ahead and real-time electricity markets

Kang Hua Cao, Han Qi, Chen-Hao Tsai, Chi Keung Woo, J. Zarnikau*

*Corresponding author for this work

Research output: Contribution to journalJournal articlepeer-review

3 Citations (Scopus)


The efficient market hypothesis (EMH) is a fundamental tenet of active and unfet-tered market trading. The EMH for intertemporal trading of a commodity such as natural gas implies that today’s futures price is an unbiased predictor of a future delivery period’s spot price and that the difference between today’s futures and spot prices reflects the commodity’s cost of carrying. The EMH for inter-regional trading requires the commodity’s regional price difference to equal the inter-regional trans-portation cost. Using regional hourly data for January 1, 2011 to December 31, 2020 from the Electric Reliability Council of Texas (ERCOT), we investigate whether the EMH is empirically valid in all ERCOT’s wholesale electricity markets and, if not, the extent of ERCOT’s energy trading inefficiency and what can be done to reduce it. By estimating a parsimonious system of eight price-level regressions and four price-difference regressions, we reject the interday EMH for all regions and the inter-regional EMH for all regional market pairs. However, ERCOT’s extent of trading inefficiency is mild when compared to the wholesale energy prices. Our empirical examples have two policy implications: enhancing ERCOT’s interday trading efficiency entails improving the day-ahead forecasts for solar and wind generation and refining ERCOT’s indicative real-time market prices, while enhancing ERCOT’s inter-regional trading efficiency requires transmission capacity expansion to reduce transmission congestion and line losses.

Original languageEnglish
Pages (from-to)59-81
Number of pages23
JournalJournal of Energy Markets
Issue number3
Publication statusPublished - Sept 2022

Scopus Subject Areas

  • Economics and Econometrics
  • Energy(all)
  • Strategy and Management

User-Defined Keywords

  • efficient market hypothesis (EMH)
  • Electric Reliability Council of Texas (ERCOT)
  • energy trading effi-ciency
  • price-difference regressions
  • price-level regressions
  • wholesale electricity market


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