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Price and volatility dynamics between electricity and fuel costs: Some evidence for Spain

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  • Furió, Dolores
  • Chuliá, Helena

Abstract

The purpose of this study is to investigate the causal linkages between the Spanish electricity, Brent crude oil and Zeebrugge (Belgium) natural gas 1-month-ahead forward prices. Following Lütkepohl et al. (2004), we control for the presence of a structural change in the series and then we use the Johansen cointegration test and a vector error correction model (VECM) to embrace the analysis. Additionally, a multivariate generalized autoregressive conditional heteroskedastic (GARCH) model is applied to explore volatility interactions between the three markets involved in the study. Our findings reveal that Brent crude oil and Zeebrugge natural gas forward prices play a prominent role in the Spanish electricity price formation process. Furthermore, causation, both in price and volatility, runs from Brent crude oil and natural gas forward markets to the Spanish electricity forward market. These results are of practical importance for both the wholesale and retail markets' participants as well as the regulator through the established link between the forward contracts' price and the Spanish tariff of last resort paid by more than 23million of customers.

Suggested Citation

  • Furió, Dolores & Chuliá, Helena, 2012. "Price and volatility dynamics between electricity and fuel costs: Some evidence for Spain," Energy Economics, Elsevier, vol. 34(6), pages 2058-2065.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:6:p:2058-2065
    DOI: 10.1016/j.eneco.2012.02.014
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    8. Stefan Thoenes, 2014. "Understanding the Determinants of Electricity Prices and the Impact of the German Nuclear Moratorium in 2011," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
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    More about this item

    Keywords

    Natural gas; Oil; Electricity; Cointegration; Volatility transmission;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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