Vulnerability of European Electricity Markets: A Quantile Connectedness Approach

Abstract

The most recent increases in Gas and Electricity prices across Europe dramatically demonstrate how vulnerable we still are to supply shocks. We investigate the transmission of shocks from natural gas prices to local electricity prices in 21 European markets. Using a quantile connectedness model our results reveal that the vulnerability of electricity markets in Europe varies over time and across quantiles. Our findings show that natural gas shocks have a significant and nearly symmetrical impact on extreme quantiles of electricity price returns. However, for intermediate quantiles, there is a notable disconnection between electricity markets and the natural gas market. We also identify the electricity markets that are most and least vulnerable to shocks in natural gas prices. These results have implications for the development of regulations and energy policies aimed at reducing the reliance on natural gas in European economies and promoting the growth of renewable energy sources.