The Relationship of Weather with Electricity Prices: A Case Study of Albania

Abstract: Electricity markets may become more sensitive to weather conditions because of higher penetration of renewable energy sources and climatic changes. Albania is 100% reliant on hydropower for its domestic energy generation, making this country compelling to investigate as it is highly sensitive to changing weather conditions. We use an ARMA-GARCH model to investigate whether weather and economic factors had a relationship with monthly hydroelectricity prices in the Albanian Energy Market in the period 2013-2018. We find that electricity price is affected by variations in weather and is not utterly robust to extreme hydrological changes. Generally, our dependent variable appears to be particularly influenced by air pressure followed by temperature and rainfall. We also perceive that there is a relationship between economic factors and hydroelectricity prices, where residual supply appears to have a significant negative relationship with our dependent variable. However, we were originally anticipating a higher dependency of electricity prices on weather conditions, due to the inflated hydro-power reliance for electricity production in the Albanian Energy Market. This effect is offset by several factors, where the state monopolized behaviour of the energy sector occupies a predominant influence on our results.