Non-linear cointegration between wholesale electricity prices and electricity generation: an analysis of asymmetric effects

Abstract

This study investigates the non-linear cointegrating relationship between wholesale electricity prices (WEP) and electricity generation from conventional sources (EGCS), using data for India. The conventional sources considered in the analysis are thermal, nuclear, and hydro. The dataset is a monthly time series covering the period from April 2012 to April 2019. The existence of a non-linear cointegration between the variables and asymmetric effects of EGCS on WEP are examined by employing a non-linear autoregressive distributed lags modelling framework. Empirical results reveal that a non-linear long-run equilibrium relationship is evident in the WEP-EGCS nexus for India. The findings indicate that in the long-run, electricity generation from nuclear and hydro sources have asymmetric effects on WEP, but thermal source has symmetric effects on WEP. However, only hydro source has asymmetric short-run effects on WEP. The findings of this study suggest that such non-linear relationships between WEP and EGCS are crucial to be accounted for identifying the optimal electricity generation fuel mix in emerging economies, including India.