Market integration and price dispersion in the European electricity market

This paper assesses the degree of market integration across eight mature electricity wholesale markets in Central and Western Europe (APX UK, APX, Powernext, Belpex, EEX, EXAA, Nord Pool, Omel) and the determinants of their price fluctuation by using advanced econometric methods. Our dataset consists of base-load, peak and off-peak wholesale prices for the period 2006-2009. Results suggest that electricity spot prices converge over time, an indication of market integration. In particular, price convergence seems to be stronger during periods of high demand (peak hours compared to off-peak hours, winter and summer compared to spring and autumn) Furthermore, price convergence is stronger in interconnected markets of neighboring countries. Finally, we found that there is a negative impact of oil price fluctuations on electricity market integration, as its increase favors the production of electricity with indigenous sources, the mix of which is different across countries.