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How Competitive is Cross-border Trade of Electricity? Theory and Evidence from European Electricity Markets

Integrating national markets is a major policy target in the European energy market. Yet, wholesale prices for electricity still differ significantly. Whether these price differences are caused only by limited interconnector capacities or also by lack of cross-border competition is an open question. To address this question, we develop a new approach to determine to which extent price differences stem from limited participation in cross-border trade. We derive a theoretical integration benchmark, using Grossman's (1976) notion of a rational expectations equilibrium. We compare the benchmark to data from European electricity markets. The data reject the integration hypothesis and indicate that well informed traders do not engage in cross-border trade.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, D44: Auctions, Q48: Energy: Government Policy, D40: Market Structure, Pricing, and Design: General, L11: Production, Pricing, and Market Structure; Size Distribution of Firms

Keywords: Market integration, Electricity markets, Interconnector, Competition policy, Rational expectations equilibrium

DOI: 10.5547/01956574.34.1.6

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Published in Volume 34, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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