Time-varying convergence in European electricity spot markets and their association with carbon and fuel prices

• Published in: Energy policy Vol. 88; pp. 613 - 627
• Main Authors: de Menezes, Lilian M., Houllier, Melanie A., Tamvakis, Michael
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.01.2016; Elsevier Science Ltd
• Subjects: Autocorrelation functions; British; Cointegration; Cointegration analysis; Convergence; Data processing; Dynamic tests; Dynamics; Electric rates; Electricity; Electricity markets; Electricity pricing; Energy markets; Europe; Evolution; Fuel oil prices; Fuels; Localized autocorrelation function; Markets; Power generation; Price convergence; Prices; Producer prices; Spots; Studies; Europe; Price convergence; Localized autocorrelation function; Cointegration; Energy markets; Electricity markets
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2015.09.008

Long-run dynamics of electricity prices are expected to reflect fuel price developments, since fuels generally account for a large share in the cost of generation. As an integrated European market for electricity develops, wholesale electricity prices should be converging as a result of market coupling and increased interconnectivity. Electricity mixes are also changing, spurred by a drive to significantly increase the share of renewables. Consequently, the electricity wholesale price dynamics are evolving, and the fuel–electricity price nexus that has been described in the literature is likely to reflect this evolution. This study investigates associations between spot prices from the British, French and Nordpool markets with those in connected electricity markets and fuel input prices, from December 2005 to October 2013. In order to assess the time-varying dynamics of electricity spot price series, localized autocorrelation functions are used. Electricity spot prices in the three markets are found to have stationary and non-stationary periods. When a trend in spot prices is observed, it is likely to reflect the trend in fuel prices. Cointegration analysis is then used to assess co-movement between electricity spot prices and fuel inputs to generation. The results show that British electricity spot prices are associated with fuel prices and not with price developments in connected markets, while the opposite is observed in the French and Nordpool day-ahead markets. •Electricity market integration policies may have altered EU spot electricity prices.•LACF is used to assess the changing nature of electricity spot prices.•EU electricity spot prices show both stationary and non-stationary periods.•Carbon and fuel prices have greater impact on British spot prices.•In continental Europe, electricity prices have decoupled from fuel prices.