A history of European electricity day-ahead prices

Abstract

In this article, we examine the development of day-ahead prices in five European markets which became more connected over recent years. Where previous studies examined the convergence of price levels over time, we focus on patterns in estimates for the parameters in a switching regimes model. This makes it possible to distinguish between prices under normal market conditions and under non-normal market conditions, those market conditions that can cause extreme price spikes. We expect that increased connectivity yields additional supply in the short-term and therefore will reduce the impact of price spikes. Our results indicate that the impact of price spikes and volatility decreased over time, that prices behave more random, and that the parameter estimates between various connected markets seem to have converged between the Belgian, Dutch, French, German and Nordic day-ahead markets over the years 2003 through 2010. These results can be explained by increased connectivity and improved liquidity.

Keywords:

• electricity day-ahead prices
• switching regimes model
• price spikes

JEL Classification:

• C51
• F02
• G14
• Q40

Notes

¹ For an overview of the characteristics of electricity price dynamics and a summary of the literature we refer to Eydeland and Wolyniec (2003), Pilipovic (2007) and Huisman (2009).

² These years are chosen because of availability of data.

³ The base load price is the equally weighted average over the prices paid for delivery of 1 MW of power during every hour on a specific day. The peak load price is the equally weighted average over the prices paid for delivery of 1 MW of power during peak hours (between 8:00 am and 8:00 pm) on a specific day.

⁴ Hamilton (1989) was the first to apply regime switching models to analyse price behaviour in financial markets. We refer to this paper for a detailed discussion of the model and estimation issues.

⁵ Therefore, the prices reflect a baseload profile.

⁶ Before November 2006, Belgium had no organized market. In the absence of an exchange, Electrabel published the Belgian Power Index (BPI), which allowed participants to buy and sell day-ahead base-load power in blocks and we use these prices as a proxy for Belgium day-ahead prices before November 2006.

⁷ The names of the specific exchanges are in parentheses. We use NPX to abbreviate NordPool Power Exchange here.