One of the major challenges of liberalising European electricity markets is to create competitive and efficient power trading markets. In this paper, we assess the overall efficiency of the German electricity wholesale market using cointegration analysis and error correction modelling. Applying these techniques allows us to evaluate the wholesale market efficiency in terms of price adjustments and the rapidity towards the adjustment in the price discovery and adjustment process. We show that the wholesale market seems to be inefficient and not well functioning. The inability of European Energy Exchange spot market in providing an efficient price reference to the power market suggest that the power exchange still lacks liquidity. Second, our results indicate that bilateral contracts keep the wholesale electricity prices intact with the EEX prices and also stabilise the volatility in the German wholesale market. Also, the econometric results suggest that the existence of the OTC market along with power exchange is creating a competitive effect in the wholesale market in Germany. Copyright © 2009 John Wiley & Sons, Ltd.