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Measuring market integration and estimating policy impacts on the Swiss electricity market

Michael Hellwig, Dominik Schober and Oliver Woll

Energy Economics, 2020, vol. 86, issue C

Abstract: We investigate market integration in Central Western European electricity markets with a focus on Switzerland. We propose a structural microeconometric approach to measuring the degree of market integration taking advantage of unilateral demand and supply shocks such as the generation from volatile renewable resources, the unavailability of generation units, and national holidays. These exogenous events affect electricity prices in Switzerland and allow estimating the level of market integration by disentangling their effects in congested and non-congested situations. Exploiting information on congested and non-congested situations in parametric instrumental-variable estimation permits simulating hypothetical non-congested Swiss electricity prices in historically congested situations. Our approach allows considering the non-linear nature of level-shifts of congestion and disentangling it from the structurally different interplay of demand and supply in respective situations. Using data on hourly electricity prices and its determinants regarding Switzerland and neighboring countries from 2015 and 2016, we find that an expansion of interconnector capacity at the German-Austrian/Swiss border could decrease Swiss electricity prices substantially. In a more attenuated way, the same holds true for the French/Swiss and the Italian/Swiss border. For Switzerland as a whole, prices in congested situations are about 17% higher than hypothetical, non-congested prices.

Keywords: Market integration; Electricity wholesale markets; Structural supply and demand estimation; Counterfactual simulation (search for similar items in EconPapers)
JEL-codes: L94 Q48 F14 F15 L98 Q41 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.eneco.2019.104637

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