Challenges of cross-border trade between two markets with different designs

Abstract

This paper discusses the challenges of cross-border trade between two electricity markets that have distinctively different market designs, namely the Nordic `energy-only' market and the capacity-based Russian market. The results presented in this paper are based on empirical and theoretical analysis concerning the use of the interconnector between the Nordic and Russia markets under different kinds of cross-border trade arrangements. The analysis shows that the possible short-term consequences of having an energy-only market on one side and a capacity-based market on the other side include the inefficient use of the interconnector capacities and inverse flows between the two markets. Market coupling is a feasible way to organize the cross-border trade even when the market designs differ. However, the existence of unilateral subsidy schemes, whether related the firm electricity generation, may give raise to concerns about the distributional effects.