Reassessing the integration of European electricity markets: A fractional cointegration analysis

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. for assessing electricity spot market convergence, because spot prices are found to be fractionally integrated and mean-reverting time series. Furthermore, spot price behaviour and their association with different markets change over time, reflecting changes in the EU electrical system. One-month-ahead prices, by contrast, were found to have become more resilient to shocks and to follow more stable trends. Permanent repository link:

An assessment of price convergence between natural gas and solar photovoltaic in the U.S. electricity market

“…Table lists all studies we are aware of that have investigated market integration and convergence costs of natural gas and/or solar power. Our methodological approach, therefore, resembles the approach applied by Phillips and Sul (2007), de Menezes and Houllier (2016), and Li et al (2014), where market integration, price convergence, and natural gas spot prices were also evaluated …”

“…13,64,65 On the other hand, de Menezes and Houllier (2016) adopted a time-varying fractional cointegration analysis using both spot and onemonth ahead prices to investigate electricity price convergence and the effect of special events on the supply side on the pace of convergence. 35 We investigated evidence for convergence of the LCOE of PV and natural gas markets (based on changes in the solar module prices ($/Watt) and the Henry Hublinked natural gas spot prices) from January 2010 to December 2015 using two techniques, namely, (1) the regression-based convergence tests proposed by Phillips and Sul (2007) and (2) Kalman filter estimations. 66 Table 2 lists all studies we are aware of that have investigated market integration and convergence costs of natural gas and/or solar power.…”

“…78 Eryilmaz and Sergici (2016), 79 Feldman et al (2014), 80 Hirth (2013), 69 Weiss et al (2013), 10 Brown & Rowlands (2009), 81 Borenstein (2008), 82 Mills & Wiser (2012, 2014). 83,84 Price convergence Zhang and Broadstock (2016), 85 de Menezes and Houllier (2016), 35 Meng et al (2013), 28 Mohammadi and Ram (2012), 29 Mills (2011), 75 Byrne et al (2011), 73 Barassi et al (2011), 27 Duro et al (2011), 30 Cuddington and Wang (2010), 42 Le Pen and Sévi (2010), 31 Liddle (2009), 32 Panopoulou and Pantelidis (2009), 24 Aldy (2006), 26 Neumann et al (2006), 13 Markandya et al (2006), 34 Zachmann (2005), 65 Rahman & Bouzguenda (1994), 77 Ezcurra (2007a), 25 80 Hirth (2013), 69 Mills & Wiser (2012, 2014) 84 To test the null hypothesis of convergence (long-run equilibrium) and show how the test works, Ref 66 proposed the following procedure:…”

“…Given the ongoing structural changes taking place in both renewable energy and natural gas markets over the period considered, two different approaches have been used, namely cointegration analysis and a time‐varying coefficient model. The explicit presence of time‐varying parameters, i.e., the presence of potential breaks in both natural gas and PV prices, makes the latter technique better suited for our analysis than the cointegration approach because it can capture contextual changes . However, we applied both approaches to (1) make it possible to identify special events within the whole period studied and (2) because the two methods complement each other.…”

“…The explicit presence of time-varying parameters, i.e., the presence of potential breaks in both natural gas and PV prices, makes the latter technique better suited for our analysis than the cointegration approach because it can capture contextual changes. 22,35,36 However, we applied both approaches to (1) make it possible to identify special events within the whole period studied and (2) because the two methods complement each other. For instance, if a given market was undergoing the process of integration during the study period, 'the cointegration approach may lead one to conclude that the market is not integrated, even if convergence and integration have been accomplished during the latter part of the period.'…”