Market Splitting and the Swedish electricity market

Abstract

A new index is introduced, the “Market Splitting Hours Share” (MSplit), varying from 0 (perfect price convergence) to 1 (no price convergence), which is inhere defined and, as an application example, used to analyse the most centrally located electricity market in the Nord Pool, the Swedish electricity market. The congestion of the existing interconnections between bidding areas creates the market splitting, with divergent electricity spot prices. The MSplit index is calculated and presented for all Swedish and related adjacent biding areas in the Nord Pool from the 2nd January 2012 to the 31st August 2015. An almost perfect price convergence is found between Swedish bidding areas 1 and 2, whilst the MSplit between Swedish bidding area 2 and 3 does not surpass 0.25, which we consider to be a good price convergence level. Good price convergence level is also found between Swedish bidding areas 3 and 4, with some excursions of the MSplit above 0.25, therefore further interconnection investment might not be worthwhile. As the index herein proposed may be used as a tool to rank other various interconnected electricity markets, MSplit can become an important instrument to be applied by national energy regulators, energy policy makers or transmissions systems operators in order to support these institutions when designing policies concerning interconnection investments.