infonet-economy

In electricity markets globally, market participants and policymakers increasingly focus on integrating adjacent, yet separate market areas via cross-border trade in electricity. Based on a discussion of the institutional framework for organizing cross-border trade, this paper analyzes how spot and futures prices for wholesale electricity are affected by different degrees of market integration. We first contrast the two main mechanisms to allocate transmission capacity between neighboring markets: explicit and implicit auctions. Subsequently, we study the impact of these allocation schemes on the empirical price dynamics of major electricity markets in Europe. Our empirical analysis thereby confirms that under market coupling, economically inefficient cross-border flows in the wrong direction can be avoided. From a policy point of view, however, we show that further market integration can be hindered by individual energy market regulation on a national level, which may be opposed to supra-national frameworks such as market coupling.