Explanatory variables on south-west spot electricity markets integration

Abstract

This paper aims to assess some determinants on the integration level of the South West Europe regional electricity spot markets created under the initiative launched by the European Regulators Group for Electricity and Gas. The integration of the European South-West regional electricity spot market relies on the physical interconnection between two pairs of Transmission Systems: Portugal-Spain and Spain-France. Interconnection capacity is thought to be critical to ensure electricity market integration and was therefore studied. Two other determinants were included in our study, corresponding to weather conditions: temperature and wind. Whilst temperature is thought to have influence on demand, wind on the other hand should have influence on available generation. Results obtained from a vector autoregression model specification show interconnection capacities related exogenous variables to not improve the model, whilst average temperature contributes slightly to improve the model. It is to note that the introduction of the exogenous variable average wind speed improves all models’ specification. Strong integration was found between MIBEL markets, leading to the conclusion that Price Splitting mechanism is efficient and contributes to the integration of spot electricity markets. Also, as demonstrated by Grange-causality and impulse response analysis, there is a weak integration level between MIBEL and Powernext.