Abstract
We employ hourly data from German and French electricity markets and show that integration of German and French electricity markets depends on the technology mix and the characteristics of neighbouring markets. Only when German and French electricity markets employ ‘similar’ generation mixes price spreads and the likelihood of the congestion of electricity flows are significantly reduced. We find that up to 31% of the price convergence is not attributed to the forces of arbitrage backed by interconnection capacities, but it is driven by coincident similarities in technology mixes. Furthermore, we document consistent evidence for the most important predictions of trade theory if markets are characterised by increasing marginal cost curves and limited cross-border capacities, i.e. limited convergence, congestion and cross-border externalities. Our results call for a coordinated European energy policy.
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