CONVERGENCE OF WHOLESALE ELECTRICITY PRICES ACROSS EUROPEAN MARKETS: ARE WE THERE YET?

Abstract

European electricity market integration has been a research focus, especially after the third electricity directive emphasizing the internal market. Electricity markets are characterized by immediate consumption with storage and transmission constraints, leading to unique price dynamics. Price convergence in European markets can lead to competitive pricing, advocating market integration. This research examines whether European wholesale spot electricity prices converge. Prior literature uses sigma and beta-convergence to test price convergence. We have examined the stochastic convergence of prices across 19 European nations from 2013 to 2021 utilizing monthly data. For this analysis, we employed LM tests incorporating trend breaks grounded on the RALS regression framework. RALS-LM tests are more powerful than linear tests when structural breaks and nonnormal errors are present. LM and RALS-LM unit root tests with two trend breaks resulted in rejection of the unit root hypothesis for all countries, suggesting relative wholesale prices are stationary. Thus, shocks to relative prices are transient, supporting price convergence at the wholesale level. This result should be considered carefully as it contradicts the results from recent literature that examines retail electricity prices using beta- sigma- and club convergence. The policy implications of this finding can provide a foundation for establishing policies that promote a harmonized and integrated European electricity market.