Abstract
The harmonization and integration of separate national energy markets to an interconnected internal European market is a top priority of the European Commission. However, as energy policy largely remains subject to national sovereignty, a higher degree of integration can cause unilateral national policies to harm interconnected markets. We investigate the impact of two distinct national reforms in Germany – the phase-out of nuclear power plants after the Fukushima incident and the expansion of renewables promoted by fixed feed-in tariffs and unlimited priority feed-in – on neighbouring countries. We find that the phase-out triggered price increases of up to 19 percent in neighbouring countries whilst the renewable energy support schemes caused a price decrease of up to 0.17 percent for each percent of additional generation from German renewables. We also apply a novel approach to estimate the degree of market integration and find large differences between neighbouring countries in a range from 14 percent to 99 percent. Our findings point up the need for increased efforts to harmonize national energy policies, but also the need to consider the impact of unilateral environmental measures on other countries` supplies in the context of a partially integrated and partly unilateral system.
Highlights
Cross-border trade in electricity is growing rapidly, albeit from a low base compared with other energy sources (Oseni and Pollitt, 2014)
Instruments for the first stage regressions in all equations are temperatures in the respective countries and their squares; in models (3) and (4) squares of the first stage predictions of load are included as additional instruments to approximate the nonparametric fit through a quadratic function of load; in columns (2) and (4) we control for congestions and instrument for the congestion variables using heteroscedasticity based instruments as suggested by Lewbel (2012); all covariates from eqs (1) and (2) are included in the estimated models though not reported for the sake of clarity and brevity; the full set of regression tables is available in the Supplementary material (Appendix Tables A.4–A.11); significance levels: * 0.05 p < 0.1, ** 0.01 p < 0.05, *** p < 0.01
Harmonization and integration of separate national energy markets to an interconnected internal European market is a top priority for the European Commission, something we do not question here
Summary
Cross-border trade in electricity is growing rapidly, albeit from a low base compared with other energy sources (Oseni and Pollitt, 2014). As with other forms of trade, there are clear benefits in aggregate: Booz and Company et al (2013) estimate the gross welfare benefits from cross-border trade in Europe will eventually amount to an average of e6.7/MWh. At the same time, trade in electricity leads to tensions between national energy policies and wider European effects. Trade in electricity leads to tensions between national energy policies and wider European effects In this context, our paper examines the monetary impact on its neighbours of two recent reforms in the German market, Europe’s biggest power market and one with significant imports and exports of electrical power. Our paper examines the monetary impact on its neighbours of two recent reforms in the German market, Europe’s biggest power market and one with significant imports and exports of electrical power These are the nuclear shutdown response to the Fukushima earthquake and the contemporaneous expansion of renewables.
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