Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of NorNed
AbstractThis paper estimates the effect of the merchant interconnector between Norway and the Netherlands on the level and residual volatility of hourly day-ahead electricity prices in the two connected markets. The price effects are estimated using single equation ARMA models and the volatility effects are estimated using EGARCH models with multiplicative heteroskdasticity. Both the level and volatility effects on prices are found to be modest. This result implies that the majority of welfare gains resulting from trade across the interconnector are likely to be accrued to its owners, undermining the practical validity of the theoretical argument that lumpiness in transmission investment leads to a divergence between social and private benefits of transmission investment. This paper finds that, on the scale of NorNed, there is little evidence to suggest that transmission capacity between different markets cannot be provided competitively.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0947.
Date of creation: 13 Nov 2009
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Web page: http://www.econ.cam.ac.uk/index.htm
merchant interconnectors; electricity prices; price volatility; time series; egarch;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
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- van der Weijde, Adriaan Hendrik & Hobbs, Benjamin F., 2012. "The economics of planning electricity transmission to accommodate renewables: Using two-stage optimisation to evaluate flexibility and the cost of disregarding uncertainty," Energy Economics, Elsevier, vol. 34(6), pages 2089-2101.
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