Integrating European Electricity Markets – what impact for consumers and producers?

The objective of this paper is to examine the impact on prices and electricity trading of integrating a small market into a larger electricity market. Economic theory would suggest that eliminating barriers to trade across a regional market will decrease consumer costs and producer profits in areas that increase imports, while increasing producer profits and consumer costs in areas that increase exports. Electricity market design is evolving with the increase in electricity generated from renewable sources. Interconnection of electricity systems should facilitate increased trade between markets and provide the flexibility needed to accommodate rising shares of renewable electricity in the system. Trade through interconnectors can exploit differences in wind and sun conditions across regions and so reduce supply variability and hence price volatility. The integration of the European regions electricity markets should therefore increase trade, reduce prices and reduce price volatility. Using a case study of Ireland we examine using econometric methods the integration of the all-island Irish electricity market into the European electricity market. Our preliminary results show that there has been little impact on day ahead prices so far but that electricity trading is operating more efficiently since the integration to the new market.