Tightly interconnected European energy industry

A study published in one of the latest issues of the renowned journal "Economics of Energy and Environmental Policy" reveals astonishing results regarding price development on the European wholesale power markets. Martin Everts, Head of Strategy & Transformation at Axpo and a co-author of the study, explains the findings in an interview with "energate"*. 

According to the study, pricing in large countries is strongly influenced from abroad. Germany is a prime example. The country has a relatively large energy market with numerous production technologies on both the lower as well as the upper end of the merit order curve. However, in 2020, German power plants only determined the price on the German market in 3,533 of 8,784 hours. During the remaining 5,251 hours, the price-setting power plants were located in France (808 hours), the Netherlands (648 hours), Poland (526 hours) or somewhere else in Europe (3,270 hours).

"Our analysis indicates a strongly interconnected German market here," responds Martin Everts, Head of Strategy & Transformation at Axpo and one of the study authors, to the question as to why pricing on the German market is so strongly influenced from abroad. In addition, Germany's neighbouring countries also have numerous competitive production technologies. In this context, Everts compares Germany with Spain. Together with France, Spain has a large neighbouring country, but a comparatively small interconnection capacity. The study shows that in 2020 the price-setting power plant for the Spanish market was a domestic one in 7,542 of 8,784 hours. 

Study indicates a high degree of interconnectivity

In general, the study indicates a high degree of interconnectivity among the researched countries, and a closely interconnected European energy industry. Large countries tend to have a strong influence on pricing in smaller neighbouring countries when large interconnection capacities are available. 

"Simply said, large countries with substantial, diversified power plant parks, such as Germany, France, Norway or Spain, influence their respective region," says Everts. Seen conversely, pricing in smaller countries with a similar network is strongly dominated by foreign countries. According to the study, during some 75 per cent of hours (6,562 hours), foreign power plants set the price on the Dutch market.

One consequence of the strong interconnectivity is that national,political measures have a cross-border impact and can influence price development and price levels abroad. "Particularly, not only national politics, but foreign energy policy is of decisive importance for smaller, strongly interconnected countries," Everts points out. A good example here is Switzerland, which Everts confirms in his interview with energate. However, Germany is also influenced by the energy policies of France, Poland and to a lesser extent by the Benelux states, says Everts in looking at the study results.

Coal and gas impact pricing less often

Another key result of the study is that coal-fired and natural gas-fired power plants set the price across all researched countries in 40 per cent of all hours in 2020. The study indicates that this number is less than previously assumed. Storage hydropower was also often the price-setting technology. It set the price in 26 per cent of all hours. The authors of the study "Eyes on the Price: Which Power Generation Technologies Set the Market Price?" used a fundamental electricity market model of interconnected bidding zones to determine hourly price-setting technologies for the year 2020. The team analysed 20 European countries. The study shows the hourly price-setting technology for these countries, as well as the source of the price-setting, marginal power plant. 

*@energate.ch - Reproduction courtesy of the trade magazine energate