Electricity and energy price interactions in modern EU markets

Abstract

This thesis studies the interactions between wholesale electricity prices and various energy and fuel prices, including those of natural gas, coal, oil and EUA carbon permits, in both spot and forward EU markets, during the late years of the noughties boom and the start of the twenty-tens. Chapter 1 introduces the thesis, Chapter 2 provides the necessary background on EU electricity prices and markets, whereas Chapter 3 presents a review of the relevant literature. Chapter 4 uses a nonlinear AR-GARCH approach to analyse the impacts of euro and pound sterling exchange rates (against the USD) and crude oil prices on the levels and volatility of six electricity spot prices. The study finds that electricity price return volatility was asymmetrically affected by both exchange rate and oil price returns in all markets only after the 2008 subprime crisis, which provided a considerably more symmetric response of electricity prices to positive and negative system innovations. Chapter 5 investigates the year-forward interactions between electricity prices and carbon, coal and natural gas prices in four markets via a combination of VAR, Granger-causality and asymmetric AR-GARCH analyses. The study shows that average electricity generators in the Nord Pool and EEX markets pass their carbon costs through to consumers with a ca. 35% higher rate than justified by effective carbon intensity, implying non-competitive practices. Additionally, coal prices are found to be the most influential determinant of European electricity price levels and volatilities. Chapter 6 analyses the integration of a sample of thirteen electricity spot markets. The application of complex network theory enables the creation of an evolving Granger-causal network of electricity price interactions, informing us on the presence of any changes in the normal functioning of electricity markets at both the national and European-wide levels. Finally, Chapter 7 summarises the conclusions of this thesis.