The Response of European Electricity Markets to Supply and Demand Disruptions in 2020-2023

Abstract

Over the period from 2020 to 2023, the continent of Europe faced two historic crises: the global COVID-19 pandemic and Russian aggression in Ukraine. These crises had profound impacts on economies and societies throughout the continent, but played a particularly large role in energy markets (for both fuel and electricity). The goal of this thesis is to consider whether either of these two crises substantially modify the relationship between fuel prices, demand, and the spot prices of electricity. This thesis develops a structural model of electricity prices based on demand, generator capacity, and fuel. An empirical analysis is then conducted with the model, using grid and fuel price data from four European countries (France, Germany, The Netherlands, and Spain) over the period of 2016 to 2023. The model is first fit over the full period so parameters and errors can be estimated. These values are then compared to parameters from the same model fit based on three smaller sub-periods (No Crisis, COVID-19, Wartime) to understand how (or whether) the market changed over the entire period. The thesis finds that the structural model is a strong fit in The Netherlands and Germany over the pre-crisis period, and continues to be a strong fit throughout the crises. On the other hand, the model is found to be less explanatory of the markets in France and Spain in the pre-crisis period and becomes even further unmoored from the market over both crises. This finding is relevant to improving future models, evaluating the efficacy of government interventions, and better understanding the impact of these crises on the various market participants.