Reassessing the integration of European electricity markets: A fractional cointegration analysis ¬リニ

a r t i c l e i n f o Keywords: Electricity market integration in Europe Market coupling Time-varying price convergence Fractional cointegration This study extends existing literature on the assessment of electricity market integration in Europe, by developing and testing hypotheses on the convergence of electricity wholesale prices, and adopting a time-varying fractional cointegration analysis. In addition, the potential impacts of some special events that may affect system capacity (new interconnection, market coupling, increase in share of intermittent generation) on spot and forward markets are considered and evaluated. are investigated. Results show that unit root tests, which are generally used in the literature to test market integration, are inadequate for assessing electricity spot market convergence, because spot prices are found to be fractionally integrated and mean-reverting time series. Furthermore, spot price behaviour and their association with different markets change over time, reflecting changes in the EU electrical system. One-month-ahead prices, by contrast, were found to have become more resilient to shocks and to follow more stable trends. The present study aims to assess whether liberalised European electricity wholesale markets are increasingly associated and converging to a single price. Empirical evidence is important since the integration of European electricity markets has been in process for many years and was planned to be completed by 2014 (European Commission, 2012a). The first step towards a pan-European liberalised wholesale market was taken in 1996 with EU Directive 96/92/EC, which defined common rules for the generation, transmission and distribution of electricity and aimed at creating an efficient supranational European market (Gebhartd and Höffler, 2007). Subsequent electricity market directives (e.g. 2003/54/EC and 2009/72/EC) have also addressed emission targets for the electricity sector and specified paths to integrate renewable energy. In the last decade, cross-border transmission has been fostered through energy transactions at power exchanges and electricity markets have been joined via interconnectors, such as the NorNed linking Norway and The Netherlands. Market coupling initiatives attempt to optimise the usage of interconnector capacity and to ensure that electricity flows from low to high price areas. Yet, in the last quarter of 2012, the European Commission claimed that a pan-European market for electricity had been delayed, because member states had been slow in adjusting their legislation and most energy policies remained centred on national interests (European Commission, 2012a). Since decisions on electricity mixes and system capacity are made by individual states, they may conflict with the …