Cross-border integration in the European electricity market. Evidence from the pricing behavior of Norwegian and Swiss exporters

Abstract

This paper examines the electricitymarketintegration process in two European areas based on the pricingbehavior of Norwegian and Swissexporters. The aim is to gain evidence for the period after the adoption of the “Second Legislative Package” (2003). The pricingbehavior of Norwegianexporters indicates that the wholesale markets for Denmark and Sweden are highly integrated. Moreover, results are fully compatible with the existence of a very competitive marketplace for electricity. This clearly contrasts with the evidence provided by Swissexporters. In this last case, analysis revealed differences in pricing-to-marketbehavior between Italy, France and Germany, which indicates that exporters take advantage of international market segmentation and divergences between market structures. This outcome provides a reasonable explanation as to why price differences between countries cannot be fully attributed to transmission costs, as has been claimed in previous research. We also found cross-country convergence in levels of markups and in pricing-to-marketbehavior of the Swissexporters for the first part of the period that was analyzed. The evidence is fully consistent with an initial impulse toward marketintegration originated by reforms implemented at the beginning of the last decade.