Impact of the carbon price on the integrating European electricity market

We study the impact of the carbon price on the integrating electricity market in the EU. Our theoretical framework suggests that the price of carbon has a positive but uneven impact on electricity prices depending on the marginal production plant. The carbon price may increase price differences in the short run. We apply time series analysis on daily forward data from 2003 to 2011 and investigate whether we can find empirical evidence for our analytical findings. Our results support the hypotheses that integration in electricity prices has increased over time and that the carbon price has a positive but uneven impact on the integration of prices.

[1]  Matteo M. Pelagatti,et al.  Long‐run relations in European electricity prices , 2010 .

[2]  Katarina Juselius,et al.  Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model , 1992 .

[3]  S. Johansen.  STATISTICAL ANALYSIS OF COINTEGRATION VECTORS , 1988 .

[4]  C. Sims.  MACROECONOMICS AND REALITY , 1977 .

[5]  Benjamin F. Hobbs,et al.  Market power in the European electricity market--The impacts of dry weather and additional transmission capacity , 2008 .

[6]  Derek W. Bunn,et al.  Integration and shock transmissions across European electricity forward markets , 2010 .

[7]  M. Thring.  World Energy Outlook , 1977 .

[8]  P. Phillips,et al.  Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? , 1992 .

[9]  Julien Chevallier,et al.  Carbon futures and macroeconomic risk factors : a view from the EU ETS , 2009 .

[10]  Paul L. Joskow,et al.  Incentive Regulation for Electricity Networks , 2006 .

[11]  S. Johansen,et al.  MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY , 2009 .

[12]  G. Maddala,et al.  Unit roots, cointegration, and structural change , 1998 .

[13]  R. Huisman,et al.  A history of European electricity day-ahead prices , 2013 .

[14]  Hanna-Liisa Kangas,et al.  The case of co-firing: The market level effects of subsidizing biomass co-combustion , 2010 .

[15]  Francois Boisseleau,et al.  The role of power exchanges for the creation of a single European electricity market: market Design and market regulation , 2004 .

[16]  Piia Aatola,et al.  Informational efficiency of the EU ETS market – a study of price predictability and profitable trading † , 2014 .

[17]  Enric Valor,et al.  CO2 Prices, Energy and Weather , 2007 .

[18]  C. Engel,et al.  European Product Market Integration after the Euro , 2004 .

[19]  C. Granger,et al.  Forecasting Economic Time Series. , 1988 .

[20]  S. Johansen,et al.  Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK , 1992 .

[21]  Dieter Helm,et al.  Energy, the State, and the Market: British Energy Policy since 1979 , 2003 .

[22]  F. Sioshansi.  Electricity Market Reform: What Have We Learned? What Have We Gained? , 2006 .

[23]  E. Benz,et al.  Liquidity and Price Discovery in the European CO2 Futures Market: An Intraday Analysis , 2008 .

[24]  Carlo Fezzi,et al.  Interaction of European Carbon Trading and Energy Prices , 2007 .

[25]  Alexander Volkov,et al.  Reforming Natural Gas Market in EU: Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas and Repealing Directive 2003/55/EC , 2012 .

[26]  Jesus Gonzalo,et al.  Five alternative methods of estimating long-run equilibrium relationships , 1994 .

[27]  John Bower,et al.  Seeking the Single European Electricity Market: Evidence from an Empirical Analysis of Wholesale Market Prices , 2004 .

[28]  Aie.  World Energy Outlook 2011 , 2011 .

[29]  Georg Zachmann,et al.  Electricity wholesale market prices in Europe: Convergence? , 2008 .

[30]  Stéphane Rodrigues,et al.  Third “Energy Package”: The European Parliament and the Council adopt the third “Energy Package” which includes two directives repealing and replacing the 2003 directives concerning common rules for both electricity and natural gas internal markets , 2009 .

[31]  K. Neuhoff,et al.  CO2 cost pass-through and windfall profits in the power sector , 2006 .

[32]  S. Littlechild.  Privatization, competition and regulation in the British electricity industry, with implications for developing countries , 2000 .

[33]  W. Fuller,et al.  Distribution of the Estimators for Autoregressive Time Series with a Unit Root , 1979 .

[34]  F. Asche,et al.  Product Aggregation, Market Integration, and Relationships between Prices: An Application to World Salmon Markets , 1999 .

[35]  Corrado Di Maria,et al.  Abatement and Allocation in the Pilot Phase of the EU ETS , 2009 .

[36]  P. Joskow,et al.  The European Union's emissions trading system in perspective , 2008 .

[37]  D. Newbery.  Privatization, Restructuring, and Regulation of Network Utilities , 2000 .

[38]  H. Weigt.  A Review of Liberalization and Modeling of Electricity Markets , 2009 .

[39]  Anna Creti,et al.  Les Cahiers de la Chaire Economie du Climat Carbon Price Drivers : Phase I versus Phase II Equilibrium ? , 2011 .