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Assessing the relationship between electricity and natural gas prices in European markets in times of distress

Jorge Uribe (), Stephania Mosquera-López () and Oscar J. Arenas ()
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Stephania Mosquera-López: Department of Finance, Universidad EAFIT, Colombia.
Oscar J. Arenas: Department of Finance, Universidad EAFIT, Colombia.

No 202117, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: We investigate the transmission of natural gas shocks to electricity prices under different scenarios of electricity generation for 21 European markets, from January 1, 2015 to March 11, 2022, proposing indicators of market vulnerability based on the quantile slopes of the regressions of electricity on natural gas and the distance between the transmission effects at very high and low quantiles of the electricity price distribution. We determine that the level of market integration is the main factor underlying national differentiation. Denmark, Finland, Sweden, and Germany are the most vulnerable markets to natural gas price shocks under distress. Our results highlight a source of vulnerability that only emerges during market distress scenarios for countries with a small, but non-zero, proportion of natural gas in domestic generation mixes under marginal cost-based electricity pricing. Further market integration is proposed to increase resilience in European electricity markets, based on a different set of regressions.

Keywords: Energy crises; Energy shortages; Power–gas integration; Energy security; Natural gas disruption; Tail risks; Market design. JEL classification: Q40; L94; L95; C22. (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-11, Revised 2021-11
New Economics Papers: this item is included in nep-ene and nep-reg
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