The Nordic-Baltic Electricity Market: An Empirical Analysis of Market Efficiency

Abstract: Increased competition faced by producers may have important consequences for electricity markets. Using 13 years of spot and futures prices, this study analyses whether introducing the Baltic states to the Nordic electricity market has translated into increased market efficiency. The theory of storage and convenience yield is considered in a regression model to allow comparison with previous findings on Nord Pool's efficiency. The results are significant and show an increased net convenience yield, equally distributed over the year, indicating a change in risk preferences of supply and demand. I argue that low spot prices incentivise hydropower producers to hedge a larger share of their production to ensure future operations. Spot price variance, water reservoir level and wind power are also found to have increased influence on this behaviour.