Why (and how) to regulate power exchanges in the EU market integration context

Abstract

The European Union (EU) market integration is leading to increasingly monopolistic electricity market infrastructures, which has opened a debate on the regulation of these so-called power exchanges. In this paper, we start by stating that there are two types of power exchanges in Europe, i.e. “merchant” and “cost-of-service regulated” power exchanges. We then discuss how regulation can be used to better align their incentives with the main power exchange tasks. We conclude that adopting the cost-of-service regulated model for all power exchanges in Europe could be counterproductive in the current context, but that regulation can help ensure that the benefits of the EU market integration materialize. Promising regulatory actions include tempering the reinforced market power of power exchanges, and quality-of-service regulation for the ongoing cooperation among power exchanges to organize trade across borders.

Research highlights ► Market integration is leading to increasingly monopolistic electricity market infrastructures. ► Regulation can help tempering the market power of these so-called power exchanges in Europe. ► Cost-of-service regulation for all power exchanges could however be counterproductive. ► More promising is to subject cooperation among power exchanges to quality of service regulation.