Since 1998, the ongoing deregulation process of the German electricity markets with the European Union as a driving force for a common market, has increased the cross-border electricity trade. Germany being the largest electricity market and transit country within the European Union plays a crucial role in this process.
Cross-border electricity trade is desirable, especially between countries with different generation technologies, since it reduces uncertainty, overall generation costs and balances price peaks. For non-discriminatory electricity trade to be possible, necessary legislation and practical common standards has to be present. This is the topic of chapter 2, which gives a survey of the legal framework and regulation of the German electricity market and an overview of electricity transmission organizations. The framework for international electricity exchange in Germany has improved considerably in recent years, but still practical adjustments need to be done before deregulation is completed.
The deregulation process initiated a commoditization process. Electricity became a tradable, negotiable entity valued by price signals emerging through supply and demand. Still, electricity differs from other commodities in fundamental aspects. It is non-storable, homogeneous and bound to conductors with unique physical characteristics. The electricity market has peculiar characteristics with large price fluctuations over the day and during the week. Supply and demand need to be balanced continuously in order to maintain demands on voltage and frequency. Factors influencing the supply and demand and the price determination process are discussed in chapter 3. I point out that electricity demand is very inelastic in the short run. Supply is very inelastic for high levels of demand, and more elastic for low demand levels.
Electricity trade requires both economic and physical constraints to be taken into account. In order to transfer electricity, transmission lines with available capacity must be accessible. Hence, the transmission grid and the corresponding system operators hold the keys to the volume and economic value of electricity exchange. For this reason, chapter 4 describing the transmission system in Germany is rather extensive. Since there is scarcity of available transmission capacity, it is of greatest importance that it is allocated in a way that gives efficient economic signals. In order to do so, auctions of the available transmission capacity for every hour on several cross-border lines are established with a day-ahead structure. This introduces competition and creates a transparent allocation. Trading concepts and congestion management on the German interconnection lines with an example from the German-Danish border are also the topics of chapter 4.
The theoretical assessment of electricity exchange, chapter 5, is based on studies by von der Fehr and Sandsbråten (1997) and Skytte (2001). I look at how trade in a competitive market, with and without losses and capacity constraints, influence the price spread in the countries of consideration. The conclusion is that electricity prices, after losses taken into account, should equal if the capacity constraints do not bind. In the case where one of them binds, there is a positive shadow price of electricity transmission, which can be used to determine bottleneck tariffs.
Chapter 6 contains the empirical part of this thesis. The data and potential estimation problems are discussed followed by a transformation of the dependent variable to linearize the relationship between the dependent and explanatory variables. On the base of the theoretical considerations, an econometric model with extensive use of dummy variables is formulated. The model s explanatory power is investigated and compared to those of a simple AR(1) model and several restrictions are imposed in order to simplify the model. In the two remaining chapters, limitations of the models are discussed and conclusions are given.