Understanding the Determinants of Electricity Prices and the Impact of the German Nuclear Moratorium in 2011

This paper shows how the effect of fuel prices varies with the level of electricity demand. It analyzes the relationship between daily prices of electricity, natural gas and carbon emission allowances with a semiparametric varying smooth co-efficient cointegration model. Different electricity generation technologies have distinct fuel price dependencies, which allows estimating the structure of the power plant portfolio by exploiting market prices. The semiparametric model indicates a technology switch from coal to gas at roughly 85% of maximum demand. This model is used to analyze the market impact of the nuclear moratorium by the German Government in March 2011. Futures prices of electricity, natural gas and emission allowances are used to show that the market efficiently accounts for the suspended capacity and correctly expects that several nuclear plants will not be switched on after the moratorium.