Causal modeling and inference for electricity markets

TL;DR

This paper applies advanced causal inference methods to analyze the dynamic flow of price information among European electricity markets and fuel sources, revealing interdependencies and equilibrium adjustments.

Contribution

It introduces a novel causal modeling approach combining time series analysis with causal inference to study electricity market dynamics and fuel price interactions.

Findings

Nordic and German electricity prices are interconnected through gas prices.

Electricity and British gas prices reach equilibrium over time.

Oil, coal, and EUR/USD are weakly exogenous in the model.

Abstract

How does dynamic price information flow among Northern European electricity spot prices and prices of major electricity generation fuel sources? We use time series models combined with new advances in causal inference to answer these questions. Applying our methods to weekly Nordic and German electricity prices, and oil, gas and coal prices, with German wind power and Nordic water reservoir levels as exogenous variables, we estimate a causal model for the price dynamics, both for contemporaneous and lagged relationships. In contemporaneous time, Nordic and German electricity prices are interlinked through gas prices. In the long run, electricity prices and British gas prices adjust themselves to establish the equlibrium price level, since oil, coal, continental gas and EUR/USD are found to be weakly exogenous.