Essays on European Electricity Market Integration.
This thesis examines three aspects relating to the construction of the single European electricity market. The research begins with a welfare analysis of market integration by estimating the impact of introducing an efficient congestion management method (i.e. market coupling) to reduce barriers to cross-border trade of electricity. The Italian electricity market, Europe’s highest-priced area, is used as a case-study. Deterministic simulations of the Italian electricity market with and without market coupling show the benefit that a high-priced country could reap from stronger market integration with its neighbours. The thesis then investigates the degree of integration of European wholesale electricity markets, by analysing the behaviour of electricity spot prices of Austria, Belgium, Czech Republic, France, Germany, Greece, Ireland, Italy, Poland, Portugal, Scandinavia, Spain, Switzerland, the Netherlands and the UK up to January 2012. Market integration is evaluated via three alternative econometric approaches, including fractional cointegration analysis, time-varying regressions and multivariate GARCH models. The results indicate that, as of January 2012, perfect EU-wide market integration is still a way off, though positive signs of convergence have emerged between many electricity markets. The final part of the thesis deals with the estimation of the determinants of residential electricity demand for nine major countries (Austria, Belgium, France, Germany, Italy, Spain, Switzerland, the Netherlands and the UK) using annual aggregate data for 1978-2009, with the aim of understanding how to incentivise electricity conservation and hence CO2 emissions reduction. A general unrestricted error correction mechanism saturated with impulse, step and step-trend dummies is used to get consistent estimates of the impact of all the variables that may influence residential electricity demand. The results, revealing important similarities in the consumption behaviour of European households, can usefully inform policy makers as to how achieving households’ electricity saving and hence CO2 emissions reduction.