Discussion Papers

Nicole Angenendt , Christian Growitsch , Rabindra Nepal, Christine Müller

Efficiency of the German Electricity Wholesale Market – Analysis and Policy Implications

No. 317 / December 2008


The liberalisation of electricity markets has meant an extensive restructuring in the electricity supply industries in many European countries. While new markets for trading power have been established, making these markets competitive and hence efficient remains a major challenge across Europe. Also, the presence of few dominant players and high concentration trends in the generation industry can be severe barriers in realizing the desired outcomes of the ongoing liberalisation process. This especially holds true for Germany where electricity generation is primarily confined to few large power producers.

Presently, as in many European countries, the wholesale trade of electricity in Germany is predominantly procured via bilateral contracts. As a result, wholesale markets liquidity remains low. One way of increasing the liquidity of the wholesale electricity spot market might be an obligatory sale to the power exchange.

This paper is an empirical analysis of the efficiency of the German wholesale market with regards to the prices of electricity volumes traded via power exchange and OTC market, using cointegration analysis and Vector Error Correction Models. Prior to this quantitative analysis a legal analysis will be performed elaborating on potential barriers concerning property rights of an obligatory trading on the German power exchange.

Our results indicate that bilateral contracts have stabilised the volatility in the German wholesale market. But, our econometric results also show that the wholesale market stability does not imply efficiency of the wholesale market as a whole. The overall inefficiency of the German wholesale market might be due to the lack of adequate liquidity at the wholesale spot market. Thus, we conclude that wholesale electricity trading via the power exchange should complement bilateral trading to a larger extent though it is not a perfect substitute completely substituting for greater liquidity, efficiency and stability of
the spot market. Moreover a legal check finds that an obligatory sales to the power exchange may cause problems in terms of ownership rights on the European and national level. This includes a potential breach of European protection of property as well as of Article 14 German Basic Law. This suggests that a lighter approach such as the obligation of more transparency and publication for the trading procedures at the power exchange and the bilateral market should be discussed.

[only a german version available]

Discussion Paper is available for download.

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