Clean spark spread : Correlation, integration and long-run relationships between electricity, natural gas and CO2 allowances prices. An empirical study on the markets in Germany, the Netherlands and the United Kingdom

Abstract

In this master thesis we study and explore the relationship between the clean spark spread commodities; electricity, natural gas and CO2 allowances prices in Germany, the Netherlands and the U.K. The time period for the analysis is based on the establishment of the EU Emissions Trading Scheme in 2005 and the following phases. In the statistical analysis we made several observations that are important for various market participants exposed to the markets. The analysis has also emphasized the importance of using several statistical techniques to explore a causal relationship. The statistical frameworks used in the analysis are correlation, co-integration, error-correction model and Granger causality. In the short-run perspective we found that prices of the same commodity at different hubs were strongly correlated in returns, while cross-commodity (spark spread) return correlations were rather weak. However, in a long-run perspective we found well-defined links between electricity and natural gas prices.