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Properties of Electricity Prices and the Drivers of Interconnector Revenue

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  • Parail, V.

Abstract

This paper examines the drivers behind revenues of merchant electricity interconnectors and the effect of arbitrage trading over interconnectors on the level and volatility of electricity prices in the connected markets. It sets out a simulation methodology that allows the stochastic and deterministic properties of prices, as well as most model parameters, to be varied freely. The effect of electricity flows over interconnectors on prices and thus on interconnector revenues is modelled explicitly by a mathematical algorithm. It is found that arbitrage can reduce the volatility and to some extent the mean of electricity prices in both markets when two markets with a similar distribution of prices are connected. It is also found that it is possible for interconnectors to generate considerable revenues without any consistent price differences between the connected markets. This shows that interconnectors between seemingly very similar electricity markets can be an attractive proposition for a profit-seeking investor.

Suggested Citation

  • Parail, V., 2010. "Properties of Electricity Prices and the Drivers of Interconnector Revenue," Cambridge Working Papers in Economics 1059, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1059
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    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1059.pdf
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    References listed on IDEAS

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    1. Rafal Weron & Ingve Simonsen & Piotr Wilman, 2003. "Modeling highly volatile and seasonal markets: evidence from the Nord Pool electricity market," Econometrics 0303007, EconWPA.
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    Cited by:

    1. Egerer, Jonas & Kunz, Friedrich & Hirschhausen, Christian von, 2013. "Development scenarios for the North and Baltic Seas Grid – A welfare economic analysis," Utilities Policy, Elsevier, vol. 27(C), pages 123-134.
    2. repec:eee:rensus:v:79:y:2017:i:c:p:533-543 is not listed on IDEAS
    3. 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.
    4. Nepal, Rabindra & Jamasb, Tooraj, 2012. "Interconnections and market integration in the Irish Single Electricity Market," Energy Policy, Elsevier, vol. 51(C), pages 425-434.
    5. Eskandari Torbaghan, Mehran & Burrow, Michael P.N. & Hunt, Dexter V.L. & Elcheikh, Marwa, 2017. "Risk-Based Framework (RBF) for a UK Pan-European Supergrid," Energy, Elsevier, vol. 124(C), pages 124-132.

    More about this item

    Keywords

    Merchant interconnectors; electricity prices; price volatility; simulation; bootstrapping;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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