Fundamental Responsiveness in European Electricity Prices

Abstract

We estimate fundamental pricing relationships in selected European day-ahead electricity markets. Using a fractionally integrated panel data model with unobserved common effects, we quantify the responsiveness of hourly electricity prices to two fundamental leading indicators of day-ahead markets: the predicted load and renewable generation. The application of fractional cointegration analysis techniques gives further insight into the pricing mechanism of power delivery contracts, enabling us to measure the persistence of fundamental shocks.

Keywords

• day-ahead electricity markets
• fundamental valuation
• panel data econometrics
• common latent effects
• long memory