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Electricity wholesale market prices in Europe: Convergence?

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  • Zachmann, Georg

Abstract

This paper tests the hypothesis that the ongoing restructuring process in the European electricity sector has led to a common European market for electricity. Based on a Principal Component Analysis (PCA) of wholesale electricity prices in 2002-2006, we reject the assumption of full market integration. For several pairs of countries, the weaker hypothesis of (bilateral) convergence is accepted based on unit root tests (KPSS and ADF) and a convergence test based on filtered pairwise price relations. This indicates that the efforts to develop a single European market for electricity were so far only partially successful. We show that the daily auction prices of scarce cross-border transmission capacities are insufficient to explain the persistence of international price differentials. Empirically, our findings confirm the insufficiency of explicit capacity auctions as stated in the theoretical literature.

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  • Zachmann, Georg, 2008. "Electricity wholesale market prices in Europe: Convergence?," Energy Economics, Elsevier, vol. 30(4), pages 1659-1671, July.
    • Handle: RePEc:eee:eneeco:v:30:y:2008:i:4:p:1659-1671
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