Hungary suffers highest cross-border electricity price volatility spillovers in EU

The cross-border electricity price volatility spillovers dominate the behavior in national electricity markets in Europe, and the effect has grown over time, according to an analysis conducted by the International Monetary Fund (IMF).

IMF has examined wholesale electricity price volatility and its spillover effects across 24 countries in the European Union.

The Hungarian wholesale electricity market is important for the Western Balkans as a benchmark power exchange. Last summer, the HUPX bourse had record prices, as did other ones in Southeast Europe. The region has experienced a huge price disparity compared to the rest of the continent, prompting governments of EU member states to ask the administration in Brussels to intervene. In December 2024, ADEX Group completed the merger with HUPX.

The authors of the IMF study said European electricity markets are in the midst of unprecedented changes caused by Russia’s invasion of Ukraine and the rise of renewable sources of energy.

The recent spike in wholesale electricity prices was broadly driven by the cost of production at natural gas power plants

Wholesale electricity prices in the EU have increased by more than 400% from an average of EUR 35 per MWh in 2020 to almost EUR 250 per MWh in December 2021, even before the war in Ukraine.

In the meantime, electricity prices have come down from their peak. Of note, wholesale day-ahead market prices came down to EUR 82 per MWh in 2024 from EUR 97 per MWh. However, IMF said they remained volatile and vulnerable to geopolitical and other shocks.

The authors noted that the recent spike in wholesale electricity prices was broadly driven by the cost of production at natural gas power plants, attributing the effect to the marginal pricing method.

Understanding the complex interactions and spillovers across countries in the EU is therefore necessary for designing appropriate energy policies and reforms, according to the study Shocked: Electricity Price Volatility Spillovers in Europe.

A higher spillover value indicates a stronger influence of cross-country shocks on domestic wholesale electricity prices

The authors analyzed the 15-minute frequency data for 24 European countries from December 1, 2014, to April 30, 2024, obtained from the European Network of Transmission System Operators for Electricity (ENTSO-E).

The approach allowed them to quantify the relative importance of domestic and other country shocks in electricity markets at different points in time thereby providing a better understanding of the transmission of risks in an international context.

A higher spillover value indicates a stronger influence of cross-country shocks on domestic wholesale electricity prices, pointing out extraneous events impacting the domestic electricity market.

The IMF’s main findings show about 73% of the forecast error variation is explained by cross-variance shares, which means only 27% can be attributed to shocks within each country. In other words, cross-border volatility spillovers dominate the behavior in national electricity markets in Europe, the study reads.

The authors have observed significant heterogeneity in the extent of volatility spillovers across countries. Ireland stands out as the country with the lowest spillover from others, while Hungary is subject to the highest level of spillover effects, according to the study.

The increased share of renewables is associated with greater volatility spillover effects

To further explore bilateral volatility spillovers across wholesale electricity markets in Europe, the authors developed an augmented gravity model and used the 15-minute frequency dataset with more than 876,582 observations on 576 pairs of countries over the period 2014–2024.

The results shed additional light on the relationship between electricity price volatility spillovers and geography and the growing share of renewables in electricity generation.

The main finding of the exercise is that the increased share of intermittent renewable sources of energy, such as solar and wind, is associated with greater volatility spillover effects in electricity markets between the countries.

Infrastructure modernization and regulatory reforms can help minimize the volatility

The authors said they cannot identify the impact of specific policy measures; however, infrastructure modernization and regulatory reforms can help minimize the volatility in wholesale electricity prices, especially during the transition to renewables.

They suggest moving from the current zonal system with cost-based redispatch to a nodal pricing system to improve the efficient distribution of electricity and dampen excessive price fluctuations, considering the growing share of renewable energy sources with greater intermittency and close to zero marginal costs of generation.

Altogether, these steps would also help with the transition to low-carbon sources of power generation, which is necessary for integrating electricity markets and strengthening energy security in Europe, IMF said.