European market integration and price convergence: A panel quantile regression analysis of NordLink

The European Union aims to strengthen electricity market integration as part of its transition to a low-carbon energy system, with substantial investments in cross-border transmission infrastructure. This paper presents the first empirical analysis of a new interconnector, NordLink, on price convergence between southern Norway (NO2) and Germany. Using a novel panel quantile regression model, we estimate the impact of NordLink on the full distribution of hourly electricity prices in both markets. We find that the cable raised average prices in NO2 and lowered them in Germany, but with substantial heterogeneity across the price distribution. In NO2, prices fell during cheap hours but rose substantially during expensive hours. In Germany, the largest reductions occurred during the most expensive hours. NordLink also increased price volatility in NO2 while reducing it in Germany, and more than doubled the sensitivity of Norwegian electricity prices to European gas prices. These findings have important policy implications. The stark asymmetry of effects across the price distribution demonstrates that cost-benefit assessments of interconnectors based on average prices can be misleading and that evaluations of planned cross-border infrastructure should incorporate distributional metrics. In addition, increased volatility and the change in the risk profile call for complementary policy responses, including the development of hedging markets, support for flexible assets, and an effective redistribution of the gains from trade to consumers who bear the costs of integration. • Panel quantile regression reveals effects masked by average price convergence. • NordLink raised Norwegian prices during expensive hours but lowered them in cheap hours. • NordLink reduced German peak prices but had little effect during cheap hours. • Norway imported price volatility and gas price exposure from Germany. • Cost-benefit assessments of interconnectors should consider distributional effects.