Trade and price variation in an integrated European power market

This paper examines the potential gains in terms of increased social surplus from integrating the power markets in Europe and assesses the scope for free seasonal and diurnal trade in a setting of Third Party Access (TPA). We construct an equilibrium model at the level of the wholesale markets, taking account of the existing power generating infrastructure (of varying flexibility) as well as the existing transmission network interconnecting the countries involved. The model indicates an overall gain from integrating the power markets. Electricity prices are substantially reduced for all regions involved, thus implying a significant redistribution of income from producers to consumers. Trade flourishes with regions establishing themselves as either pure exporters, pure importers or as intermediaries acting as transit countries.