Abstract
We use multivariate Generalized Autoregressive Conditional Heteroscedastic models to assess evidence of electricity market integration between Spain, Portugal, Austria, Germany, Switzerland and France from 7-1-2007 to 2-29-2012. Spillovers and price convergence are used as indicators of integration. Evidence of dynamic conditional correlation is found for the pairs Spain-Portugal, Ger-many-Austria and Switzerland-Austria. Weak evidence of integration is found between Spain-France and Germany-France since no cross volatility transmissions are estimated. There are increasing price convergence and significant mean and volatility spillovers in the rest of the country pairs. We conclude that the European Union target of achieving a single electricity market depends largely on increasing interconnections and efficient rules of market operation.
Highlights
The European Union (EU) set the ambitious target of fully integrating national energy markets by 2014
Estimation results for MIBEL show that a dynamic conditional correlation (DCC) model with univariate variance processes incorporating cross ARCH effects is selected to model prices
This may imply a process of market integration in terms of spillovers and price convergence which has grown up in recent years and is expected to continue in the future with new interconnections
Summary
The European Union (EU) set the ambitious target of fully integrating national energy markets by 2014. Some progress has been made since the first steps were taken with the passing of Directive 96/92/EC, which set common rules for the construction of the single European electricity market by which country members must favor the interconnection and interoperability of systems. Regional market integration has already been launched: MIBEL, the Iberian electricity market formed by Spain and Portugal was set up in July 2007, and the EPEX power exchange, which includes France, Germany, Austria and Switzerland, in 2010. Worthington et al (2005) study volatility transmissions between the regional electricity markets in the NEM Australian market using data from 1998 to 2001 and conclude that regional markets are not fully integrated due to the lack of a well developed network of interconnections. The paper concludes with some policy implications of the study
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