Transfer entropy and causal price spillovers between core and Southeast European electricity markets

This study examines the causal dynamics of electricity market integration and price differentials across seven European markets—Austria, Bulgaria, Greece, Hungary, Italy (South), Romania, and Slovenia—using the nonlinear, information-theoretic framework of Normalized Transfer Entropy (NTE). The approach identifies directional information flows among generation, demand, and cross-border exchanges, allowing a data-driven reconstruction of the underlying causal structure of market interactions. The results reveal a clear structural divide between the Central European Core markets operating under Flow-Based Market Coupling (FBMC) and the Southeastern European (SEE) markets that apply the Net Transfer Capacity (NTC) methodology. FBMC markets form a highly integrated, renewable-driven system characterized by strong bidirectional feedback and rapid price convergence, whereas NTC markets exhibit weaker causal connectivity and slower adjustment. A key empirical finding is that Austria functions as a major causal hub within the FBMC area, transmitting renewable- and gas-driven price signals that propagate outward and amplify price volatility in Greece and Bulgaria. This spillover mechanism is identified as a primary driver of the 2024 price surge in the SEE region. The findings imply that durable price convergence requires not only additional physical interconnection but also methodological harmonization—particularly the alignment of capacity calculation methods, the enforcement of the 70% margin made available for cross-zonal capacity trade (MACZT) rule, and enhanced cross-border flexibility—to reduce systemic causal fragmentation within the European electricity market.