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The Impacts of Variable Renewable Production and Market Coupling on the Convergence of French and German Electricity Prices

This paper estimates the impact of two separate factors on the spread between French and German electricity prices, the amount of production by variable renewables and "market coupling". As renewable electricity production is concentrated during a limited number of hours with favourable meteorological conditions and interconnection capacity between France and Germany is limited, increases in production of wind and solar PV in Germany lead to increasing price spreads between the two countries. Our estimates based on a sample of 24 hourly French and German day-ahead prices from November 2009 to June 2013 confirm that renewable electricity production in Germany has a strongly positive impact on price divergence. On the other hand, market coupling, the establishment of a combined order book on the basis of information of both markets, which was introduced in November 2010, can be shown to have mitigated the observed price divergence. Both results have policy relevant implications for welfare and the optimal provision of interconnection capacity.

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Energy Specializations: Electricity – Other; Electricity – Generation Technologies; Electricity – Markets and Prices ; Renewables – Policy and Regulation; Renewables – R&D and Emerging Technologies; Renewables

JEL Codes:
Q49 - Energy: Other
Q2 -
D42 - Market Structure, Pricing, and Design: Monopoly
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
O32 - Management of Technological Innovation and R&D

Keywords: Electricity price convergence, Renewable energies, Intermittency, Market coupling, France, Germany

DOI: 10.5547/01956574.37.3.jkep

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Published in Volume 37, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.