The effect of a new power cable on energy prices volatility spillovers

Abstract

In this paper, we estimate volatility spillovers before and after the introduction of a new cable linking different electricity market zones. Using wholesale electricity prices for Sardinia and two neighbouring Italian market zones for the period 2005-2015, we focus on the effects of the SAPEI cable, fully operational since March 2011. VAR-GARCH estimates indicate that the SAPEI cable allowed for stronger volatility transmission towards Sardinia, a smaller zone and a net importer from its new neighbour, the Central Southern zone, albeit the effect was significant only off-peak. Higher conditional correlations between zonal prices are also observed after the cable was introduced. Some implications are drawn about the interaction between market size, export positions, congestion, and volatility transmission.