Assessing the Impact of NordLink on Market Integration between NO2 and Germany

Abstract

The EU has expressed ambitions for a more integrated European energy market with increased security of electricity supply from renewable energy sources. The transition to renewable energy production has received considerable attention in the European energy market. In this context, Norway, with its access to regulated hydropower, has been considered a key nation. To enable the transition, several interconnections have been laid to the bidding zone NO2 in Norway. One of these interconnections is NordLink, which stretches from Tonstad in Southern Norway to Wilster in Germany.

This thesis examines how NordLink has contributed to increased market integration between the Norwegian and German energy markets. To investigate this, two analyses are carried out. The first analysis examines how the energy interplay between hydropower production in NO2 and German energy production and load has evolved since the introduction of the cable. To analyze the energy interplay, two VAR models with associated tests are designed.

Furthermore, the second analysis examines the price dynamics between the respective markets. This involves German energy prices and their short- and long-run relationships with the electricity price in NO2, both before and after the implementation of NordLink. To conduct the analysis, the Engle-Granger method is employed. This applied both to the short- and long-run relationships.

Our empirical findings from both analyses indicate that NordLink has contributed to an increased market integration between the markets. The results from the energy interplay analysis suggest that the German load contributes to increased hydropower production in NO2. Conversely, our results indicate that German energy production reduces hydropower production in NO2. The results from the price analysis also indicate increased market integration as a consequence of the interconnector. After NordLink’s introduction, it can be observed that there exist more short- and long-run relationships between the electricity price in NO2 and German energy prices than before the interconnector. In addition, our results suggest that the relationships have been strengthened.

To conclude, our findings indicate that NordLink has contributed to increased market integration between the Norwegian and German energy markets. This applies to both energy production and energy prices in the respective markets.

The EU has expressed ambitions for a more integrated European energy market with increased security of electricity supply from renewable energy sources. The transition to renewable energy production has received considerable attention in the European energy market. In this context, Norway, with its access to regulated hydropower, has been considered a key nation. To enable the transition, several interconnections have been laid to the bidding zone NO2 in Norway. One of these interconnections is NordLink, which stretches from Tonstad in Southern Norway to Wilster in Germany.

This thesis examines how NordLink has contributed to increased market integration between the Norwegian and German energy markets. To investigate this, two analyses are carried out. The first analysis examines how the energy interplay between hydropower production in NO2 and German energy production and load has evolved since the introduction of the cable. To analyze the energy interplay, two VAR models with associated tests are designed.

Furthermore, the second analysis examines the price dynamics between the respective markets. This involves German energy prices and their short- and long-run relationships with the electricity price in NO2, both before and after the implementation of NordLink. To conduct the analysis, the Engle-Granger method is employed. This applied both to the short- and long-run relationships.

Our empirical findings from both analyses indicate that NordLink has contributed to an increased market integration between the markets. The results from the energy interplay analysis suggest that the German load contributes to increased hydropower production in NO2. Conversely, our results indicate that German energy production reduces hydropower production in NO2. The results from the price analysis also indicate increased market integration as a consequence of the interconnector. After NordLink’s introduction, it can be observed that there exist more short- and long-run relationships between the electricity price in NO2 and German energy prices than before the interconnector. In addition, our results suggest that the relationships have been strengthened.

To conclude, our findings indicate that NordLink has contributed to increased market integration between the Norwegian and German energy markets. This applies to both energy production and energy prices in the respective markets.