A fractional cointegration analysis of European electricity spot prices

Previous studies that tested for integration of European electricity spot markets employed standard unit root tests. This study extends the existing literature about electricity market integration by adopting a fractional cointegration analysis and providing empirical evidence that the classical unit root test framework, which tests for common stationary trends, may be inadequate because of long range dependencies in electricity spot prices. Hourly data from APX-ENDEX (UK and Netherlands), EPEX (Germany, Switzerland), Nordpool (Finland, Denmark, Norway) and Powernext (France) are employed between January 2009 and April 2011. Results based on parametric fractional ARIMA models suggest that long memory and cointegration in some but not all markets exists. Germany and the Netherlands seem to share the strongest cointegrating relationship. France and Germany as well as France and the Netherlands also share a common stationary trend. Hence, price shocks can be lasting and the EU policy goal of market integration is yet to be achieved.