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Market integration and the persistence of electricity prices

Abstract

There is an ongoing trend of deregulation and integration of electricity markets in Europe and North America. This change in market structure has naturally affected the interaction between agents and has contributed to an increasing commoditization of electric power. This paper focuses on one specific market, the Iberian electricity market (MIBEL). In particular, we assess the persistence of electricity prices in the Iberian market and test whether it has changed over time. We consider each hour of the day separately, that is, we analyze 24 time series of day-ahead hourly prices for Portugal and another 24 series for Spain. We find results consistent with the hypothesis that market integration leads to a decrease in the persistence of the price process. More precisely, the tests detect a break in the memory parameter of most price series around the year 2009, which coincides with a significant increase in the integration of the Portuguese and Spanish markets. The results reinforce the view that market integration has an impact on the dynamics of electricity prices.

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Notes

  1. 1.

    Further details at http://www.epexspot.com/en/market-coupling.

  2. 2.

    PJM Interconnection is a regional transmission organization that coordinates the movement of wholesale electricity in Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia.

  3. 3.

    Price data for both markets are available at www.omip.pt.

  4. 4.

    Note, however, that the actual capacity of the transmission lines is a function not only of the nominal transmission capacity, but also of several constraints, such as air temperature or the state of the each countries’ own transmission network. Furthermore, the programmed availability of renewable energies also has an effect on the maximum transmission capacity the TSOs make available.

  5. 5.

    Hourly generation data were provided by REN.

  6. 6.

    We have also considered the case where a linear trend is included and the results are qualitatively similar.

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Acknowledgements

We thank REN for providing data on Portuguese power generation. We are also grateful to an Associate Editor and two anonymous referees for useful comments and suggestions.

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Correspondence to António Rua.

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Pereira, J.P., Pesquita, V., Rodrigues, P.M.M. et al. Market integration and the persistence of electricity prices. Empir Econ 57, 1495–1514 (2019). https://doi.org/10.1007/s00181-018-1520-x

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Keywords

  • Electricity prices
  • Market integration
  • Persistence change
  • Long memory

JEL Classification

  • C50
  • E31
  • F36