Integrating European Electricity Markets

The creation of a single Internal Electricity Market is a prominent item in the European agenda. This research provides a comprehensive and up-to-date analysis of the issues surrounding theoretical and policy developments in this area. The report is structured as follows. The first chapter discusses the economic foundations of the mechanisms being developed to integrate national electricity marketing. We cast the market integration issue within the more general context of congestion management. We analyze the impact of specific technical features of electricity on the efficient prices of electricity, on the format and content of the rights to use transmission resources, as well as on the features of alternative congestion management mechanisms. The second chapter deals with market power in electricity markets. The section surveys the main contributions in the economic literature in a common analytical framework. It also provides several examples in order to show how different elements of market design might be crucial in affecting the presence of market power and the way it might be exercised. In particular, the fact that firms might exercise market power by implementing strategies that in other industries would not be interpreted as reflecting market power calls for specific market monitoring in wholesale electricity markets. The third chapter links the theoretical findings of the first chapter with the current political debate on the most efficient mechanisms for coupling national electricity markets. We review the alternative options being discussed to address the main design issues and we cast them in a unifying framework. The last chapter reports on the state of the different regional electricity initiatives (ERI). It also provides a detailed description of the main features of the national markets belonging to the Central-South Region, identifying the specific harmonisation needs in the area.