INTEGRATION AND CONVERGENCE IN EUROPEAN ELECTRICITY MARKETS

The liberalization process of electricity markets in Europe is more than a decade old. In the meantime, mergers and restructuring of big players in generations at the international level make likely that decisions and price strategies are taken simultaneously on several markets, based on a common set of available information. There is large evidence that organized electricity spot markets are far from the ideal competitive model and therefore all sorts of behaviors and shocks may influence price formation in those markets, ranging from international fuel price, local meteo, and local market power behavioral shocks. Several important institutional similarities exist among European electricity markets (market design and homogenous regulation of cross-border trade) but several important differences exist among European electricity markets in the physical (number and size of generation units) and technological structure (sources of electricity generation) of their generation industries. In this context several authors have wondered whether market outcomes can confirm the success of the reforms with respect to the EU's common market policy. Bower (2002) finds that some European electricity markets (especially the Nordic countries, the Netherlands, and its neighbors) were already integrated to a certain extent by 2001. Boisseleau (2004) underlines that the level of integration of European markets is quite low. Armstrong and Galli (2005) highligth that European electricity prices (France, Germany, the Netherlands and Spain) converged from 2002 to 2004. Finally Turkey (2006) provided empirical evidence for the insufficient correlation of flows and price analyzing Anglo-French Interconnector. In this respect, we think that we are setting forth a weaker assumption on market behavior, for we simply assume that it is rational for suppliers and buyers to adjust their behavior according to available information. Given the previous rather weak assumption, we think that for a rational agent the most efficient way to process and incorporate information in his own decision mechanism is to take into account all relevant information available. So we consider at the same time natural and necessary to use the entire dataset about the hourly price setting. In this paper we use data about four major European electricity pool markets: Austria, Germany, France and Italy for the 2004 2010 period.