Market integration and regional markets

In the first phases of liberalization, the main emphasis of governments, regulators and market stakeholders is on the establishment of individual markets, typically at a national or state level.

Open and competitive markets have created new opportunities for market participants for trading between different areas, thereby increasing liquidity and contributing to optimal use of existing network (and generation) capacities. In many regions, this has resulted in severe congestion between different markets since existing network capacities are insufficient to satisfy the entire demand from the market.

Experience has also shown that many countries are too small to allow for sufficient competition to develop. However, such problems may be overcome by merging individual countries or areas into a single regional market. Scope is thereby reduced for companies to gain market power and the market can support a larger number of players. This was demonstrated by the successful establishment of the Nordic electricity market across four different countries almost ten years ago. Moreover, regional integration further helps to optimize operation of the overall system by removing boundary issues and allowing optimization of integrated production, network operation and trading.

Over time, focus has therefore shifted towards the integration of neighboring markets or, eventually, the creation of regional markets. This trend has been observed in Europe, the U.S. and other regions world-wide. In Europe, activities in different Regional Initiatives are aimed at the creation of regional power and gas markets. Similarly, the U.S. is pursuing its Standard Market Design based on the concept of regional wholesale markets operated by ISOs and/or RTOs.

We have been actively involved in the conceptual development and implementation of regional energy markets. We have been advising governments, regulators, market and system operators as well as international institutions, such as the European Commission, on the benefits and requirements of regional integration. In addition, our experts are helping stakeholders to understand the different concepts and assess the resulting opportunities, risks and requirements in the new environment.

Development towards regional markets varies both in the degree of integration and the concepts or instruments being used. Moreover, it is necessary to consider different market models and legal and regulatory issues as well as organizational, technical and procedural aspects. Successful regional integration therefore requires a wide range of conceptual analyses and activities, such as:

  • choice of integration models, such as market coupling or market splitting
  • adequate representation of network capacities, including the use of transfer capacities, flow-based methods (PTDF) or nodal pricing
  • transition towards coordinated allocation of cross-border capacities
  • establishment of regional balancing markets and regional exchange of reserves
  • organization of boundary issues between different regions; and
  • market modeling and economic analysis.