European Market Integration and Price Convergence: A Panel Quantile Regression Analysis of NordLink

Abstract

The European Union aims to strengthen electricity market integration as part of its transition to a low-carbon energy system, with substantial investments in cross-border transmission infrastructure. This paper presents the first empirical analysis of a new interconnector, NordLink, on price convergence between southern Norway (NO2) and Germany. Using a novel panel quantile regression model, we estimate the impact of NordLink on the full distribution of hourly electricity prices in both markets. We find that the cable raised average prices in NO2 and lowered them in Germany, but with substantial heterogeneity across the price quantiles. In NO2, lower-quantile prices fell while upper-quantile prices rose. In Germany, the largest reductions occurred in the upper price quantiles. Regarding volatility, NordLink increased price fluctuations in NO2 and reduced them in Germany. We also find that the interconnector has altered the relationship between electricity prices and key fundamentals. Notably, electricity prices in NO2 have become substantially more exposed to gas prices post-NordLink, while Germany has become less exposed. Our findings highlight that market integration influences not only average prices, but also the dynamics and structure of electricity.

Keywords: Electricity prices, econometric analysis, interconnector, price volatility, renewables

JEL Classification: C31, C33, Q21, Q41