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A Markov Switching Model of the Merit Order to Compare British and German Price Formation

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  • Georg Zachmann

Abstract

The objective of this paper is to develop a model to determine the price formation of wholesale electricity markets. For that purpose, we model wholesale electricity prices depending on the prices of fuels (coal and natural gas) and of CO2 emission allowances using a Markov Switching Regression. We apply the model to wholesale electricity prices in the UK and in Germany. While British electricity prices are quite well explained by short-run cost factors, we find a decoupling between electricity prices and fuel costs in Germany. This may be evidence that the German electricity generation sector does not work competitively.

Suggested Citation

  • Georg Zachmann, 2007. "A Markov Switching Model of the Merit Order to Compare British and German Price Formation," Discussion Papers of DIW Berlin 714, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp714
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.61917.de/dp714.pdf
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    References listed on IDEAS

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    1. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 703-725, Winter.
    2. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    3. Ali Hortacsu & Steven L. Puller, 2005. "Understanding Strategic Bidding in Restructured Electricity Markets: A Case Study of ERCOT," NBER Working Papers 11123, National Bureau of Economic Research, Inc.
    4. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    6. Huisman, Ronald & Mahieu, Ronald, 2003. "Regime jumps in electricity prices," Energy Economics, Elsevier, vol. 25(5), pages 425-434, September.
    7. Arciniegas, Ismael & Barrett, Chris & Marathe, Achla, 2003. "Assessing the efficiency of US electricity markets," Utilities Policy, Elsevier, vol. 11(2), pages 75-86, June.
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    Citations

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    Cited by:

    1. Koenig, P., 2011. "Modelling Correlation in Carbon and Energy Markets," Cambridge Working Papers in Economics 1123, Faculty of Economics, University of Cambridge.
    2. Weigt, Hannes & Hirschhausen, Christian von, 2008. "Price formation and market power in the German wholesale electricity market in 2006," Energy Policy, Elsevier, vol. 36(11), pages 4227-4234, November.
    3. Victor Moutinho & António Carrizo Moreira & Jorge H. Mota, 2015. "Measuring the Simultaneous Quantity Game in OMEL Spot Electricity Market," International Journal of Energy Economics and Policy, Econjournals, vol. 5(1), pages 305-320.
    4. Komain Jiranyakul, 2015. "Oil Price Volatility and Real Effective Exchange Rate: The Case of Thailand," International Journal of Energy Economics and Policy, Econjournals, vol. 5(2), pages 574-579.
    5. Pollitt, Michael, 2008. "The arguments for and against ownership unbundling of energy transmission networks," Energy Policy, Elsevier, vol. 36(2), pages 704-713, February.
    6. Alois Rhiel & Bernhard Heitzer & Berthold A. Bonekamp & Christian von Hirschhausen & Anne Neumann & Hannes Weigt, 2008. "Energiekonzerne: Steigende Umsätze, steigende Gewinne, steigende Preise. Fehlt der Wettbewerb?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 61(01), pages 03-15, January.
    7. Moutinho, Victor & Moreira, António C. & Mota, Jorge, 2014. "Do regulatory mechanisms promote competition and mitigate market power? Evidence from Spanish electricity market," Energy Policy, Elsevier, vol. 68(C), pages 403-412.

    More about this item

    Keywords

    Electricity prices; Markov Switching Models;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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