Measuring Market Integration and Estimating Policy Impacts on the Swiss Electricity Market

We investigate market integration in Central Western European electricity markets with a focus on Switzerland. We propose a structural microeconometric approach to measuring the degree of market integration taking advantage of unilateral demand and supply shocks such as the generation from volatile renewable resources, the unavailability of generation units, and national holidays. These exog-enous events affect electricity prices in Switzerland and allow estimating the level of market integra-tion by disentangling their effects in congested and non-congested situations. Exploiting information on congested and non-congested situations in parametric instrumental-variable estimation permits simulating hypothetical non-congested Swiss electricity prices in historically congested situations. Our approach allows considering the non-linear nature of level-shifts of congestion and disentangling it from the structurally different interplay of demand and supply in respective situations. Using data on hourly electricity prices and its determinants regarding Switzerland and neighboring countries from 2015 and 2016, we find that an expansion of interconnector capacity at the German-Austrian/Swiss border could decrease Swiss electricity prices substantially. In a more attenuated way, the same holds true for the French/Swiss and the Italian/Swiss border. For Switzerland as a whole, prices in congest-ed situations are about 17 percent higher than hypothetical, non-congested prices.

Hellwig, Michael, Oliver Woll and Dominik Schober (2020), Measuring Market Integration and Estimating Policy Impacts on the Swiss Electricity Market, Energy Economics 86