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Electricity wholesale market prices in Europe: Convergence?

  • Zachmann, Georg

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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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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  1. Turvey, Ralph, 2006. "Interconnector economics," Energy Policy, Elsevier, vol. 34(13), pages 1457-1472, September.
  2. 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.
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  4. Neuhoff, K., 2003. "Integrating Transmission and Energy Markets Mitigates Market Power," Cambridge Working Papers in Economics 0310, Faculty of Economics, University of Cambridge.
  5. Bernard, A.B. & Durlauf, S.N., 1993. "Convergence in International Output," Working papers 93-7, Massachusetts Institute of Technology (MIT), Department of Economics.
  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.
  7. Jesús Otero & Jeremy Smith, 2005. "The KPSS Test with Outliers," Computational Economics, Society for Computational Economics, vol. 26(3), pages 59-67, November.
  8. 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.
  9. Bernard, A.B. & Durlauf, S.N., 1994. "Interpreting Tests of the Convergence Hypothesis," Working papers 9401r, Wisconsin Madison - Social Systems.
  10. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
  11. 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.
  12. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
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