Seeking the single European electricity market : evidence from an empirical analysis of wholesale market prices

The objectives of this paper are to assess the progress made towards a single European wholesale electricity market by the end of 2001, and identify remaining sources of economic inefficiency. Statistical analysis of day-ahead prices, in fifteen European locations, show Nord Pool (Scandinavia), and German, wholesale markets were almost perfectly competitive, but frequent price spikes, and reversion to equilibrium levels above marginal generation costs, occurred elsewhere. Daily price changes were well correlated between Nord Pool locations, but not others. Cointegration analysis shows prices were well integrated between all locations, except Spain. Results are consistent with arbitrage trading between locations, and the existence of a single European electricity market. However, the market is inefficient because generating firms exercised market power at some locations, and mechanisms to allocate capacity on congested transmission lines were weak. The European Commission should increase competition by breaking up dominant generating firms, not subsidising transmission capacity construction