Convergence of Wholesale Electricity Prices in Europe?

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1 Convergence of Wholesale Electricity Prices in Europe? - A Time Series Analysis of Hourly Spot Prices - Georg Zachmann 7th IAEE European Energy Conference Bergen, August 28 3th, 5

2 Agenda 1. Aim of the Study and Literature 2. Data 3. Method 4. Results 5. Conclusion 2

3 Motivation Regulation 1228/3/EC does not specify a preferable market based congestion management method Cross-border capacity auctions became standard in Central Europe Durable inefficient auction outcomes lead to inefficient trade flows and thus to welfare losses due to an international scheduling that is based on wrong price signals 3

Central Europe Durable inefficient auction outcomes lead to inefficient trade flows

4 Aim of the Study Test whether and how European electricity prices interact Test whether electricity wholesale prices are converging towards the law of one price Develop a model based on the law of one price for the interaction of European electricity prices Develop an indicator of convergence Test if there is significant convergence in the hourly prices 4

based on the law of one price for the interaction of European electricity prices Develop

5 Literature Armstrong, Margaret and Galli, Alain, 5. Are day-ahead prices for electricity converging in continental Europe? An exploratory data approach. CERNA Working Paper. Boisseleau, François, 4. The role of power exchanges for the creation of a single European electricity market: market design and market regulation. Delft University Press. Bower, John, 2. Seeking the Single European Electricity Market: Evidence from an Empirical Analysis of Wholesale Market Prices. Economics Working Paper Archive at WUSTL. 5

The role of power exchanges for the creation of a single European electricity market: market design and market regulation.

6 1. Aim of the Study and Literature 2. Data 3. Method 4. Results 5. Conclusion 6

7 Data Power Exchange (Spot Market Volume in TWh 4 / Total Consumption in TWh 4 = Share of electricity traded at PX) SWE(NN / 145) DKW(NN / 21) Nordpool DKE(NN / 14) PPX (1.6 / 13 = 1.2%) APX (13 / 11 = 12.2%) EEX (59 / 513 = 11.6%) OTE (.3 / 61 =.5%) PNX (14 / 476 = 3.%) 7

145) DKW(NN / 21) Nordpool DKE(NN / 14) PPX (1.6 / 13 = 1.

8 Intra-day Seasonalities APX DKE EEX DKW PNX SWE PPX OTE Strong seasonalities at APX Moderate seasonalities at EEX, PNX, DKW and OTE Minor seasonalities at DKE, SWE and PPX Prices in /MWh 8

9 Correlation of wholesale spot prices with their first and second common component NordPool West Denmark (UCTE) CENTREL West-European (APX, EEX, PNX), NordPool (DKE, SWE) and Central- European (OTE, PPX) prices are clustered together West Danish (DKW) prices are in-between UCTE core region 9

PNX), NordPool (DKE, SWE) and Central- European (OTE, PPX) prices are

10 Timing of cross border auctions and spot markets Cross Border Auctions Power Exchanges EON- TenneT (EEX-APX) EON- ELTRA (EEX-DKW) APX Elspot (NordPool) EEX Available capacity known to market participants 8:3 9: Bid for 1 MW at 5 End of bidding 9: 9:3 1:3 12: 12: Offer 1 MW at 5 Bid for 1 MW at Publication of Results 9:3 1: 11: 12: 12:15 1

Available capacity known to market participants 8:3 9: Bid for 1 MW at 5 End of

11 5 3 1 Transmission Auction Results EON => ELTRA Off Peak: EEX=>DKW Peak: DKW=>EEX EON=>ELKRAFT Off Peak & Peak: EEX=>DKE EON =>TenneT RWE =>TenneT Off Peak: Price is zero on average. 1 1 Peak: High price for exporting power from EEX=>APX Prices in /MWh

EON =>TenneT 5 3 2 3 4 RWE =>TenneT Off Peak: Price is zero on average.

12 1. Aim of the Study and Literature 2. Data 3. Method 4. Results 5. Conclusion 12

13 Law of One Price The time varying coefficent framework with and white noise process 13

14 1. Aim of the Study and Literature 2. Data 3. Method 4. Results 5. Conclusion 14

15 Time variant coefficient (α t ) EEX-APX 3h: Smooth convergence EEX-APX 13h: Outlier dominate the picture EEX-DKW 3h: Alpha is close to 1 in 4 EEX-DKW 13h: Alpha is close to 1 in 4 EEX-DKE 3h: Convergence and setbacks EEX-DKE 13h: No visible trend Kontek line closure 15

close to 1 in 4 EEX-DKW 13h: Alpha is close to 1 in 4 EEX-DKE 3h:

16 Proximity indices (γ t ) and convergence indicator (θ) APX-EEX -Convergence towards arbitragefreeness in off-peak. -No significant convergence in peak due to outliers DKW-EEX -significant convergence in peak and off-peak. DKE-EEX -No significant convergence in peak and off-peak. 16

-No significant convergence in peak due to outliers DKW-EEX

17 Growth and significance of the convergence indicator 2-4 EON - TenneT (EEX-APX) tprob EON - ELTRA (EEX-DKE) EON - Elkraft (EEX-DKW) theta incpt tprob theta incpt tprob theta incpt h,6,9,9,21,1,81,9,1,86 3h,2,17,85,29,8,73,8,16,76 5h,3,18,83,36,,74,13,13,76 7h,1,19,81,19,11,83,7,14,85 9h,1,,74,18,2,83,9,12,84 11h,31-1,24 -,9,19,2,8,8,21,78 13h,13,21,51,1,8,77,8,19,8 15h,26,18,3,15,4,82,11,11,84 17h,25-6,48-7,12,,4,85,6,13,87 19h,74-5,88 -,19,18,3,84,8,15,84 21h,7,13,85,17,8,83,9,1,89 23h,3,14,88,13,13,84,6,15,86 17

5h,3,18,83,36,,74,13,13,76 7h,1,19,81,19,11,83,7,14,85 9h,1,,74,18,2,83,9,12,84 11h,31-1,24 -,9,19,2,8,8,21,78

18 Number of hours with significant price convergence EON - TenneT (EEX-APX) EON - ELTRA (EEX-DKE) EON - Elkraft (EEX-DKW)

19 1. Aim of the Study and Literature 2. Data 3. Method 4. Results 5. Conclusion 19

20 Conclusion 1 West Danish and German prices converged significantly for more than half of the hours of the day. This effect can be attributed to the increasing efficiency of cross border auctions, since the spot price differential remained. Since already the initial level of arbitrage possibilities in 2 between both countries was low, the markets now determine almost efficient prices.

This effect can be attributed to the increasing efficiency of cross border auctions, since the

21 Conclusion 2 Dutch and German prices converged significantly for half of the hours of the day. The convergence occurs mainly in the off-peak, whereas no convergence exists in the peak periods of the day. This might be explained by the enormous price spikes. 21

22 Conclusion 3 East Danish and German prices did not exhibit convergence. Possible explanations: Asynchronously operating transmission systems with different production structures (UCTE and Nordel) Existence of only one interconnection, which has been subject to various closures in the sample period. Auction design and market power might also play a role. 22

23 Conclusion 4 Convergence seems to take place more steadily than stepwise. This indicates that this process is driven by slow adaptation of market players to framework changes (learning). At least at the day ahead markets, the introduction of explicit auctions increases efficiency over time (compared to non-market based congestion management methods) 23

Power market integration. Geir-Arne Mo Team Lead Nordic Spot Trading Bergen Energi AS

Power market integration. Geir-Arne Mo Team Lead Nordic Spot Trading Bergen Energi AS Power market integration Geir-Arne Mo Team Lead Nordic Spot Trading Bergen Energi AS 1 Geir-Arne Mo Some background information: Working for Bergen Energi since 2015 Team Lead Nordic Spot Trading I work