Long and short-run relationship among electricity and fossil fuel prices in the European industry sector

The cointegration relationship between electricity, gas, oil and coal was investigated using panel data and models considering the industrial sector in 22 countries in Europe between 1989 and 2013. A shorter period including the allowances market creation in Europe is also accounted (2005-2013). The empirical findings reported in the paper reveal that electricity and fuel prices are non-stationary and cointegrated series. As such, the present paper accounts for cross-section dependence when analyzing the electricity-fuel nexus. The results of this study indicate that there exists a stronger long run equilibrium relationship between electricity prices and fuel prices in the industry sector. These differences may be explained by the industry higher resilience in long run contracts within the energy sector.