The European Power Industry: Asymmetries and Price Volatility

M. Isabel and R.T. Soares (Portugal)


Electricity, market rules, price volatility, GARCH. JEL Classification: C3, L9.


Deregulation of European electricity markets is driven by economic policy in order to remove or make cross subsidies transparent, to allocate capital efficiently and to achieve the lowest cost to end-users. Meanwhile, long after Directive 96/92/EC and even Directive 2003/54/EC large differences between European partners still exist: both of market structure, competitive level and public service & customer protection. Price setting is in the core of these problems. Electricity prices features involve high volatility and volatility clustering. As risk and uncertainty of generators considerably increase in a liberalised context, price volatility becomes the main source of uncertainty. As price volatility introduces additional cost for supply and presents many challenges for producers, consumers, companies and policymakers, we use a GARCH type time series model and get some empirical evidence on the spot price volatility of the Spanish electricity market, one of the European Regional Markets which are increasingly important in the liberalisation path. We draw some insights on the relationship between market structure and price behavior. Wholesale trading market price holds as the unique reference for physical supply contracts negotiations with industrial consumers. Actually, the electricity trading regime gives price signals which have significant volatility, which in turn, contributes to an unstable environment.

Important Links:

Go Back