Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 16: Multinational Electricity Market Integration and Electricity Price Dynamics

Jens Lundgren (), Jörgen Hellström () and Niklas Rudholm ()
Additional contact information
Jens Lundgren: Department of Economics, Postal: Umeå University, SE-901 87 Umeå, Sweden
Jörgen Hellström: Department of Economics, Postal: Umeå University, SE-901 87 Umeå, Sweden
Niklas Rudholm: The Swedish Retail Institute, Postal: Regeringsgatan 60, 103 29 Stockholm, Sweden

Abstract: The paper empirically explores the electricity price dynamics in the Nordic electricity market, Nord Pool. In particular, the focus is on determining what effect the multinational market integration, during the years 1996-2006, has had on the conditional mean electricity price, its volatility, the price jump-intensity and the price jump size. Empirically the study reveals that the conditional mean electricity price increased when Finland joined the Nord Pool exchange, and the price remained at the higher level when Denmark also joined. Turning to the price volatility, this increased when Finland joined, mainly due to an increase in jump size, and decreased when Denmark also joined Nord Pool. However, the price jump-intensity decreased both when Finland and Denmark joined the market. This means that a large electricity market integration in Scandinavia seems to reduce the probability of sudden price jumps. That is, the multinational electricity market integration in Scandinavia seems to have created a market that handles external shocks to supply and demand better than the separate national electricity markets previous did.

Keywords: Electricity price; market integration; jump risk; EGARCH; Exponential Autoregressive conditional Jump Intensity

JEL-codes: C22; L10; L69

24 pages, April 15, 2008

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