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Abstract

This paper tests the hypothesis that the ongoing restructuring process in the European electricity sector has led to a common European market for electricity. Based on a Principal Component Analysis (PCA) of wholesale electricity prices in 2002-2006, we reject the assumption of full market integration. For several pairs of countries, the weaker hypothesis of (bilateral) convergence is accepted based on unit root tests (KPSS and ADF) and a convergence test based on filtered pairwise price relations. This indicates that the efforts to develop a single European market for electricity were so far only partially successful. We show that the daily auction prices of scarce cross-border transmission capacities are insufficient to explain the persistence of international price differentials. Empirically, our findings confirm the insufficiency of explicit capacity auctions as stated in the theoretical literature.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 30 (2008)
Issue (Month): 4 (July)
Pages: 1659-1671

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Handle: RePEc:eee:eneeco:v:30:y:2008:i:4:p:1659-1671

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Web page: http://www.elsevier.com/locate/eneco

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References

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1. Jesús Otero & Jeremy Smith, 2007. "The KPSS Test with Outliers," Computational Economics, Society for Computational Economics, vol. 29(3), pages 423-423, May.
   
   • Jesús Otero & Jeremy Smith, 2005. "The KPSS Test with Outliers," Computational Economics, Society for Computational Economics, vol. 26(3), pages 59-67, November.
   • Otero, Jesus & Smith, Jeremy, 2003. "The KPSS Test with Outliers," The Warwick Economics Research Paper Series (TWERPS) 690, University of Warwick, Department of Economics.
2. Andrew B. Bernard & Steven N. Durlauf, 1994. "Interpreting Tests of the Convergence Hypothesis," NBER Technical Working Papers 0159, National Bureau of Economic Research, Inc.
   
   • Bernard, Andrew B. & Durlauf, Steven N., 1996. "Interpreting tests of the convergence hypothesis," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 161-173.
   • Bernard, A.B. & Durlauf, S.N., 1994. "Interpreting Tests of the Convergence Hypothesis," Working papers 9401r, Wisconsin Madison - Social Systems.
3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "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?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
   
   • Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
   • Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "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?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
4. De Vany, Arthur S. & Walls, W. David, 1999. "Cointegration analysis of spot electricity prices: insights on transmission efficiency in the western US," Energy Economics, Elsevier, vol. 21(5), pages 435-448, October.
5. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
6. Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005. "Electricity transmission: An overview of the current debate," Utilities Policy, Elsevier, vol. 13(2), pages 73-93, June.
   
   • Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge.
7. Bernard, Andrew B & Durlauf, Steven N, 1995. "Convergence in International Output," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 97-108, April-Jun.
   
   • Bernard, A.B. & Durlauf, S.N., 1993. "Convergence in International Output," Working papers 93-7, Massachusetts Institute of Technology (MIT), Department of Economics.
8. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge.
9. Charles Engel & John H. Rogers, 2004. "European product market integration after the euro," Economic Policy, CEPR & CES & MSH, vol. 19(39), pages 347-384, 07.
10. Miguel S. Aubyn, 1999. "Convergence across industrialised countries (1890-1989): new results using time series methods," Empirical Economics, Springer, vol. 24(1), pages 23-44.
11. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
12. Turvey, Ralph, 2006. "Interconnector economics," Energy Policy, Elsevier, vol. 34(13), pages 1457-1472, September.

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Cited by:

1. Growitsch, Christian & Stronzik, Marcus & Nepal, Rabindra, 2012. "Price convergence and information efficiency in German natural gas markets," EWI Working Papers 2012-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
2. repec:mop:credwp:08.09.77 is not listed on IDEAS
3. repec:mop:credwp:08.12.79 is not listed on IDEAS
4. Balaguer, Jacint, 2011. "Cross-border integration in the European electricity market. Evidence from the pricing behavior of Norwegian and Swiss exporters," Energy Policy, Elsevier, vol. 39(9), pages 4703-4712, September.
5. Le Pen, Yannick & Sévi, Benoît, 2010. "On the non-convergence of energy intensities: Evidence from a pair-wise econometric approach," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/6801, Université Paris-Dauphine.
   
   • Le Pen, Yannick & Sévi, Benoît, 2010. "On the non-convergence of energy intensities: Evidence from a pair-wise econometric approach," Ecological Economics, Elsevier, vol. 69(3), pages 641-650, January.
6. Nepal, R. & Jamasb, T., 2011. "Market Integration, Efficiency, and Interconnectors: The Irish Single Electricity Market," Cambridge Working Papers in Economics 1144, Faculty of Economics, University of Cambridge.
7. Richter, Jan & Viehmann, Johannes, 2013. "The Value of Information in Explicit Cross-Border Capacity Auction Regimes in Electricity Markets," EWI Working Papers 2013-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
8. Oberndorfer, Ulrich, 2009. "EU Emission Allowances and the stock market: Evidence from the electricity industry," Ecological Economics, Elsevier, vol. 68(4), pages 1116-1126, February.
9. Le Pen, Yannick & Sévi, Benoît, 2010. "Volatility transmission and volatility impulse response functions in European electricity forward markets," Energy Economics, Elsevier, vol. 32(4), pages 758-770, July.
   
   • Sévi, Benoît & Le Pen, Yannick, 2010. "Volatility transmission and volatility impulse response functions in European electricity forward markets," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/5450, Université Paris-Dauphine.
10. Leonardo Meeus, 2010. "Why (and how) to regulate Power Exchanges in the EU market integration context?," RSCAS Working Papers 2010/12, European University Institute.
    
    • Meeus, Leonardo, 2011. "Why (and how) to regulate power exchanges in the EU market integration context?," Energy Policy, Elsevier, vol. 39(3), pages 1470-1475, March.
11. Rafik Jbir & Lanouar Charfeddine, 2012. "Short Term Relationships between European Electricity Markets," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 276-281, June.
12. Meeus, Leonardo, 2011. "Implicit auctioning on the Kontek Cable: Third time lucky?," Energy Economics, Elsevier, vol. 33(3), pages 413-418, May.
    
    • Leonardo Meeus, 2010. "Implicit Auctioning on the Kontek Cable: Third Time Lucky?," RSCAS Working Papers 2010/49, European University Institute.
13. Gebhardt, Georg & Höffler, Felix, 2008. "How to Determine whether Regional Markets are Integrated? Theory and Evidence from European Electricity Markets," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 236, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
14. Bilgili, Faik, 2010. "Energy tax harmonization in EU: Time series and panel data evidence," MPRA Paper 24013, University Library of Munich, Germany.
15. Egil Ferkingstad & Anders L{\o}land & Mathilde Wilhelmsen, 2011. "Causal modeling and inference for electricity markets," Papers 1110.5429, arXiv.org.
16. Ferkingstad, Egil & Løland, Anders & Wilhelmsen, Mathilde, 2011. "Causal modeling and inference for electricity markets," Energy Economics, Elsevier, vol. 33(3), pages 404-412, May.
17. Bruno Bosco & Lucia Parisio & Matteo Pelagatti & Fabio Baldi, 2010. "Long-run relations in european electricity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(5), pages 805-832.

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