A Comparative Analysis of Price Drivers of Day-Ahead Electricity Prices in EPEX and Nord Pool
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European energy markets have undergone, and will continue to undergo, large changes in coming years, as the share of renewable energy power production increases and markets become more interconnected. We analyze the fundamental drivers behind electricity spot prices in Nord Pool and the German European Power Exchange (EPEX), and compare the price formation dynamics in these two markets. The comparison is motivated by the NordLink cable which will connect Germany and Norway in 2020. It will exploit the different market characteristics, and is expected to reduce the price spread and improve utilization of renewable energy sources.Our thesis increases the understanding of the market mechanisms, which is required by market participants in order to adapt to the future changes. A linear quantile regression is used to estimate quantiles spanning the entire price distribution. Separate regression models are estimated for each trading period to capture highly varying intraday properties of the electricity prices.We examine the price formation dynamics across the entire distribution, and how it differs between Nord Pool and EPEX.The results show that the fundamental variables impact the two markets differently and non-linearly throughout the trading day. Autoregressive effects are most influential in Nord Pool, together with demand and supply in the highest quantile. Overall, most variables have a low price impact; this is likely due to the large amount of flexible and stable hydro power which cancels out fluctuations in other parameters. EPEX has a higher number of important price drivers across the price distribution. Demand is the primary price determinant, while fossil fuel prices, autoregressive effects, and wind power production also notably impact the price formation. The energy mix characteristics are the likely reason for these differences, as EPEX is much more inflexible due to large-scale thermal production and intermittent renewable energy. Clearly, market participants can utilize the different characteristics and mutually benefit from the upcoming connection.