Efficiency in the Nord Pool Electricity Exchange

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: In recent years criticism of the electricity market has been emerging. Some claim that for Sweden, the deregulation of the power market in 1996 (and consequently Sweden’s involvement in Nord Pool) has been a driving factor of rising electricity prices and a non-efficient market for electricity. Some critique is aimed at the small number of large producers of electricity, possibly making the market oligopolistic in its form and therefore ineffective. This has been analyzed, among others by Hjalmarsson (2000). Others, such as the Swedish Energy Agency, point to the criticism of the pricing mechanisms of the energy market, claiming it to be inefficient (Statens energimyndighet, 2006). This paper will focus on the efficiency of the electricity market, since it is a less explored area in the case of Nord Pool than the literature regarding market competition and therefore might have new answers as to whether Nord Pool is a well-functioning market. The efficient market hypothesis (EMH) is a way of theoretically illustrating at what degree a market is efficient. It defines market efficiency as how prices reflect information. In the original hypothesis, put forth by Eugene Fama, there are three forms of efficiency; weak, semi-strong and strong. This paper will be focusing on the measure of weak efficiency. The weak form efficient market theory stipulates that all historical prices are incorporated in current prices. An implication of the efficient market theory is that if a market is inefficient it fails to price its product correctly since the information available is not fully incorporated in the price. It would also imply that buyers and sellers of electricity do not take all information into account. The purpose of this study is to investigate whether or not the Nordic electricity market Nord Pool is weakly efficient within the context of the theoretical framework of the efficient market hypothesis. Additionally, the possibility of whether the market has evolved to become more efficient over time is explored. By evaluating historic spot and futures price data from an econometric perspective I aim to bring some clarity to whether there is any viability in the claims of the electricity market being inefficient.

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