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. Show more