Unpacking the effects of natural gas price transmission on electricity prices in Nordic countries

Abstract

Since the Russia-Ukraine war in February 2022, European electricity prices have experienced considerable turbulence, primarily attributed to a shortage in the natural gas supply. We investigate the relationship between natural gas prices in the European continent and electricity prices in Nordic countries before and after the outbreak of war. Despite the low proportion of natural gas electricity generation, the empirical analysis reveals both direct and indirect transmission paths for natural gas prices in Nordic countries. Meanwhile, the theoretical analysis demonstrates how Nordic renewable (wind and solar) and other non-gas generators exercise market power through price bidding in the anticipation of an increase in gas prices or a shortage of gas supply, which results in higher electricity prices. Understanding the underlying factors and dynamics driving substantial price fluctuations in the Nordic electricity market is essential for comprehending the intricate interconnections within the European energy landscape. Graphical abstract: [Figure not available: see fulltext.]