Size and Flow - Does it make a difference? Multinational electricity market integration and price effects at the Nordic electricity market

Abstract: The liberalisation process and the (re)structuring of the electricity markets within Europe has been subject to extensive discussion during the last decade. A key concept in this discussion is the creation of multinational electricity markets. This thesis examines the process of multinational electricity market integration and price effects at the Nordic electricity market, Nord Pool. A theoretical model aiming to predict the effects of multinational electricity market integration is devised. The model defines the electricity spot price as the dependent variable and several market integration aspects as explanatory variables. The model is tested with an OLS-regression. The results presented indicate that multinational electricity market integration does have a significant effect on electricity prices at the Nordic power market, although not entirely as expected by the theoretical model. Increased flow of electricity across borders tends to decrease the spot price of electricity while the size of the electricity market in terms of increased volumes of trade tends to increase the spot price of electricity. Put differently, it seems as if increased volumes of trade do not per se benefit the customers in terms of lower electricity prices, rather the opposite. Instead, the results of this study points towards the importance of interconnectivity and transmission infrastructure.