Conference Agenda

Although market integration is important to accommodate the increasing share of renewables in Europe, it also leads to price contagion from the high-price market to the low-price market, which is a politically contentious issue. To shed light on this issue, we use a novel method of panel quantile regression to estimate the impact of a new transmission cable between Norway and Germany on price formation in the two markets. Our findings are summarized in four key points. First, price convergence has on average been modest, especially compared to other drivers of prices. Our baseline results imply an increase in the average spot price of +2% in Norway, and a reduction of -4.4% in Germany. Second, there is substantial variation in the effect of the cable across the price quantiles. In fact, we find a negative effect of the cable on prices during low-price hours in Norway. Third, the cable has also affected the volatility of prices. In Norway, the price volatility has increased after the cable opened, whereas in Germany it has decreased. Fourth, the relationship between the price and several of its explanatory variables has changed after the cable opened. For example, electricity prices in Norway has become more exposed to fuel prices after the cable. Thus, it appears that Germany has not only exported higher prices to Norway, but also transferred some of its price volatility and exposure to fuel price fluctuations. Our findings have important implications for the policy discussion. To evaluate the impact of market integration on consumers, it is vital to consider not only the effect on average prices, but also its impact on the full price distribution and potential interaction effects.