Fossil Fuels and European Power Markets - The 2007/08 Fossil Fuels Shock and its Causal Effects on European Power Markets

Fossil fuels were exposed to a significant shock during the Global Economic and Financial Crisis of 2007/08. This paper examines the influence of Brent Crude Oil, Natural Gas and Coal on three major European power markets (APXUK, NordPool, and Phelix) during this period of significant uncertainty. The research study offers historical insights on the dynamics of the markets over a critical period of economic and financial instability. A univariate and bivariate methodological framework supports the research study enabling the analysis of short-run, long-run and asymmetric power of market responses to fossil fuels dynamics. The results point to a stronger relationship between fossil fuels shocks and the APXUK market across all three generational fuels. In contrast, the results for Phelix are significant only in the case of coal and crude oil. For the Nordic region, there is no substantial evidence of a causal effect between the power market and the broader energy markets. Thanks to its strong focus on renewables, the Nordic market appears to be insulated from shocks emerging from fossil fuels. On the other hand, APXUK and Phelix accounted for a higher representation of fossil fuels on their energy mix, and as such, they were significantly exposed to fossil fuel fluctuations.