Liberalisation, consumption heterogeneity and the dynamics of energy prices

Abstract

In this study, the methodology VAR and the cointegration analysis are used to examine the dynamic interaction among the energy prices of the competitor energy sources in a liberalised market. Data from the UK market were applied, and models for the residential and industrial sectors were developed. Our results indicate the existence of long-run relationships between the energy prices before and after the liberalisation, implying the possibility of substitution among the different forms of energy. However, the results appear to be also largely influenced by external variables not included in the models that may be reducing the importance of the energy prices over their own evolution and offsetting the basic substitution relationships. The general results of the Impulse Response Functions, both for the residential and industrial sectors, present low statistical significance, which seems to be due to the still slow rate of adjustment of the energy market to price changes, along with the immaturity of the liberalisation process. Taking into consideration the results, some routes for future research are pointed out, namely the need to include in the analysis variables which would proxy the general state of the economy.