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Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of NorNed

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  • Parail, V.

Abstract

This 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.

Suggested Citation

  • Parail, V., 2009. "Can Merchant Interconnectors Deliver Lower and More Stable Prices? The Case of NorNed," Cambridge Working Papers in Economics 0947, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0947
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    Cited by:

    1. Intini, Mario & Waterson, Michael, 2020. "Do British wind generators behave strategically in response to the Western Link interconnector?," The Warwick Economics Research Paper Series (TWERPS) 1242, University of Warwick, Department of Economics.
    2. 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.
    3. Andri Dan Traustason & Hilmar Þór Hilmarsson, 2016. "Iceland-UK Interconnector: A Brief Analysis of Possible Political Risk Mitigation and Dispute Settlement," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 5(1), pages 66-74, February.
    4. Chatzivasileiadis, Spyros & Ernst, Damien & Andersson, Göran, 2013. "The Global Grid," Renewable Energy, Elsevier, vol. 57(C), pages 372-383.

    More about this item

    Keywords

    merchant interconnectors; electricity prices; price volatility; time series; egarch;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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