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Price and volatility interrelationships in the wholesale spot electricity markets of the Central-Western European and Nordic region: a multivariate GARCH approach

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Abstract

This paper examines price and volatility interrelationships in five European, day-ahead, wholesale spot electricity markets. These include the French, German, Belgian and Dutch electricity markets, forming the Central-Western European (CWE) region, as well as the Nord Pool Spot electricity market, a pool market for the Nordic region. For this purpose, a novel VAR model with dummy variables was developed to model the conditional mean price, while the CCC-MGARCH model and a DCC-MGARCH model were used to model volatility. The results suggest that evidence of market integration, as measured by cross-mean spillovers and conditional correlation, do exist in the electricity markets under examination. Nevertheless, they also indicate that the CWE electricity markets are stronger integrated, while, on the other hand, weaker integration is observed between them and the Nordic electricity market. We attribute these findings to the fact that physical interconnection capacity is not sufficient for the electricity markets to become fully integrated.

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Notes

  1. Although the EPEX Spot Power Exchange also covers the electricity market of Austria and Switzerland, these two electricity markets do not participate in the market integration mechanism and thus, they are not included in the analysis. On the other hand, the NPS is a pool electricity market, with one common system price for the entire Nordic region (Denmark, Norway, Sweden, Finland, and the Baltic states). This common system price is then adjusted internally to several local market nodes, at which the national electricity markets of the region are divided. The market coupling between the CWE and the Nordic region takes place at the level of this common system price. Thus, this common system price is included in our analysis [34].

  2. A feedback relationship between two price series exists when the dependence coefficient \(\varphi _{ij}^k\), which denotes the linear price dependence between markets i and j, for lag k, is \(\varphi _{ij}^k \ne 0\), while at the same time \(\varphi _{ji}^k \ne 0\) [43, p. 349].

  3. A feedback relationship between two price series i and j exists when the dependence coefficient \(\varphi _{ij}^ \ne 0\), while at the same time \(\varphi _{ji}^ \ne 0\). A unidirectional relationship exists when the dependence coefficient \(\varphi _{ij}^ \ne 0\), but at the same time \(\varphi _{ji}^ =0\) [43, p. 349]. Building on this concept we could consider that a feedback relationship between two price series does not exists when one of \(\varphi _{ij}^k \) or \(\varphi _{ji}^k \) is non-significant. In this case, a unidirectional relationship should be considered.

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Authors and Affiliations

  1. Department of Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece

    Michail S. Sotiriadis, Radamanthis Tsotsos & Kyriaki Kosmidou

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  1. Michail S. Sotiriadis
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  2. Radamanthis Tsotsos
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Correspondence to Kyriaki Kosmidou.

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Sotiriadis, M.S., Tsotsos, R. & Kosmidou, K. Price and volatility interrelationships in the wholesale spot electricity markets of the Central-Western European and Nordic region: a multivariate GARCH approach. Energy Syst 7, 5–32 (2016). https://doi.org/10.1007/s12667-014-0137-1

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