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The impact of emissions trading on electricity spot market price behavior

Matylda Jabłońska (Department of Mathematics and Physics, Lappeenranta University of Technology, Lappeenranta, Finland)
Satu Viljainen (LUT Energy, Lappeenranta University of Technology, Lappeenranta, Finland)
Jarmo Partanen (LUT Energy, Lappeenranta University of Technology, Lappeenranta, Finland)
Tuomo Kauranne (Department of Mathematics and Physics, Lappeenranta University of Technology, Lappeenranta, Finland)

International Journal of Energy Sector Management

ISSN: 1750-6220

Article publication date: 7 September 2012

Abstract

Purpose

Under the Kyoto protocol, emissions trading was imposed upon the Nordic Nord Pool Spot market in 2005. The purpose of this paper is to identify and characterize an important side‐effect of emissions trading on electricity spot market price behavior by statistically comparing price behavior before and after emissions trading was introduced.

Design/methodology/approach

The analysis is based on an analysis of the skill of regression models in explaining price behavior before and after 2005.

Findings

It turns out that regression models based on background variables such as temperature, water reservoir levels, and even the price of emission rights themselves lose much of their skill from 2005 onwards. The histogram of the residual time series of an optimally calibrated regression model demonstrates a considerably more “fat‐tailed” behavior after 2005, with a much higher volatility and reduced amenability for regression by background variables.

Practical implications

The results point to an increased medium‐ and long‐term uncertainty in the Nordic electricity spot market, brought about by emissions trading as an unintended side‐effect. It seems emissions trading has introduced a stronger “psychological” component into price behavior, increasing its volatility and making it prone to more frequent price spikes. This has made the electricity market more difficult for market managers and regulators to manage.

Originality/value

The paper presents the first statistical attempt to quantify the way electricity spot price dynamics have changed in Europe after starting the Emissions Trading Scheme based on the Kyoto protocol.

Keywords

Citation

Jabłońska, M., Viljainen, S., Partanen, J. and Kauranne, T. (2012), "The impact of emissions trading on electricity spot market price behavior", International Journal of Energy Sector Management, Vol. 6 No. 3, pp. 343-364. https://doi.org/10.1108/17506221211259664

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited