Integration of European Electricity Markets: Evidence from Spot Prices

This paper investigates the current state of market integration among European electricity day-ahead spot prices. In our empirical analysis we utilize a large sample of hourly spot prices of 25 European markets for the period 2010Jan01/01h– 2015Jun30/24h and combine it with other relevant data such as hourly interconnector capacities and the existence of market coupling. Firstly, empirical results from cointegration analysis indicate that market integration increased from 2010 to 2012 but then declined until 2015, despite the introduction of market coupling in many markets. Secondly, we empirically assess error correction after price shocks and reach the conclusion that markets’ strength of the error correction mechanism is rather modest. In general, our findings suggest that the integration among European electricity markets has a large potential for improvements from additional capacity investments and further promotion of market coupling.

[1]  Arthur S. De Vany,et al.  Price Dynamics in a Network of Decentralized Power Markets , 1999 .

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

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

[4]  B. Goodwin.  Multivariate Cointegration Tests and the Law of One Price in International Wheat Markets , 1992 .

[5]  P. Schmidt,et al.  A robust version of the KPSS test based on indicators , 2007 .

[6]  Yannick Le Pen,et al.  THE IMPACT OF INTERMITTENT RENEWABLE PRODUCTION AND MARKET COUPLING ON THE CONVERGENCE OF FRENCH AND GERMAN ELECTRICITY PRICES , 2016 .

[7]  L. Grossi,et al.  A Vision of the European Energy Future? The Impact of the German Response to the Fukushima Earthquake , 2014 .

[8]  G. Erdmann,et al.  Economics of electricity , 2015 .

[9]  C. Granger,et al.  Co-integration and error correction: representation, estimation and testing , 1987 .

[10]  P. G. Ardeni,et al.  Does the Law of One Price Really Hold for Commodity Prices , 1989 .

[11]  P. Phillips.  Testing for a Unit Root in Time Series Regression , 1988 .

[12]  Rabindra Nepal,et al.  Price Convergence and Information Efficiency in German Natural Gas Markets , 2015 .

[13]  The Oxford Institute for Energy Studies , 1988 .

[14]  A. D. Vany,et al.  Cointegration analysis of spot electricity prices : Insights on transmission efficiency in the western US , 1999 .

[15]  J. Stock,et al.  Efficient Tests for an Autoregressive Unit Root , 1992 .

[16]  T. Jamasb,et al.  Interconnections and market integration in the Irish Single Electricity Market , 2012 .

[17]  Justus Haucap,et al.  Benefits of an integrated European electricity market , 2013 .

[18]  D. Bunn,et al.  Structural Analysis of Electricity Demand and Supply Interactions , 2010 .

[19]  David F. Hendry,et al.  Explaining Cointegration Analysis: Part II , 2000 .

[20]  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 .

[21]  Lutz Kilian,et al.  The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas , 2008, Journal of Political Economy.

[22]  The Electricity Wholesale Sector: Market Integration and Competition , 2010 .

[23]  K. Hadri.  Testing The Null Hypothesis Of Stationarity Against The Alternative Of A Unit Root In Panel Data With Serially Correlated Errors , 1999 .

[24]  Alvaro Escribano,et al.  Modelling Electricity Prices: International Evidence , 2011 .

[25]  The convergence of electricity prices in Europe , 2007 .

[26]  David F. Hendry,et al.  Explaining Cointegration Analysis : Part I , 1999 .

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