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Convergence of Electricity Wholesale Prices in Europe?: A Kalman Filter Approach

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  • Georg Zachmann

Abstract

This study tests the hypothesis that the ongoing restructuring process in the European electricity sector, as well as market participants' adaptation to the new legal framework, have caused electricity wholesale day-ahead prices to converge towards arbitrage freeness. Using hourly cross-border capacity auction results at the Dutch-German and at the Danish-German border for the years 2002 to 2004, and the respective spot prices. We estimate a time-varying coefficient model based on the law of one price (LOP). The results of these estimations are used to calculate the speed of convergence towards the LOP. While the German-Dutch prices and the German-West Danish prices are clearly developing towards arbitrage freeness, the German and East Danish prices do not exhibit significant convergence.

Suggested Citation

  • Georg Zachmann, 2005. "Convergence of Electricity Wholesale Prices in Europe?: A Kalman Filter Approach," Discussion Papers of DIW Berlin 512, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp512
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.43586.de/dp512.pdf
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    Citations

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    Cited by:

    1. Bruno Bosco & Lucia Parisio & Matteo Pelagatti & Fabio Baldi, 2007. "A robust multivariate long run analysis of European electricity prices," Working Papers 20070901, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica.
    2. Finon, Dominique & Romano, Elliot, 2009. "Electricity market integration: Redistribution effect versus resource reallocation," Energy Policy, Elsevier, vol. 37(8), pages 2977-2985, August.
    3. Renou-Maissant, Patricia, 2012. "Toward the integration of European natural gas markets:A time-varying approach," Energy Policy, Elsevier, vol. 51(C), pages 779-790.
    4. Capitán Herráiz, Álvaro & Rodríguez Monroy, Carlos, 2009. "Analysis of the efficiency of the Iberian power futures market," Energy Policy, Elsevier, vol. 37(9), pages 3566-3579, September.
    5. Bruno Bosco & Lucia Parisio & Matteo Pelagatti & Fabio Baldi, 2006. "Deregulated Wholesale Electricity Prices in Europe," Working Papers 20061001, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica.
    6. Derek Bunn & Georg Zachmann, 2010. "Inefficient arbitrage in inter-regional electricity transmission," Journal of Regulatory Economics, Springer, vol. 37(3), pages 243-265, June.

    More about this item

    Keywords

    Electricity prices; European integration; Time series analysis;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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