Cross-border and cross-regional electricity transmission: Is there a price impact in south Norway?

Abstract

The potential impact of cross-border electricity exchange on domestic prices is a topic of active public debate in many countries. In this study, we quantify the extent to which electricity flows have contributed to hourly spot prices in Southern Norway (bidding region NO2). Using data from 2015 to 2024 and a system of non-crossing quantile regressions, we find that while electricity transmission flows have a limited effect on expected and median prices, they do help explain variation in the tails of the future price distribution. Specifically, regional electricity transmission and transmission with Netherlands and Denmark is only weakly associated with future prices. By contrast, electricity flows with Great Britain and Germany/Luxembourg have the potential to increase price volatility in Norway. While these effects can be economically significant, in-sample, they do not translate into improved out-of-sample forecasts of the price distribution. We discuss the policy implications of these findings and conclude that, on average, cross-border electricity flows do not themselves lead to increases in market prices. However, decoupling wholesale and retail prices for households through government subsidies and the introduction of fixed-rate schemes effectively addresses increased price volatility. Regarding the debate over restricting electricity flows, our results suggest that such policies should be trading partner-specific and should take into account the varying conditions under which cross-border electricity flows occur.