Energy Market Integration and Electricity Trade

This paper explores energy trade in the electricity market by undertaking a comprehensive empirical analysis of the effect of Europe’s progressive Energy Market Integration (EMI). Its aim is to quantify the effect of EMI on electricity trade in Europe in order to derive corresponding evidenced- based policy implications. The empirical strategy employs standard goods trade gravity models, adapted to energy trade in the electricity market and estimated using standard gravity techniques. We use energy trade flows between European countries to quantify the effect of the successive EMI enlargements on energy flows. The paper highlights relevant fact-based policy implications for integrating electricity markets. Our results suggest that EMI creates electricity trade among members, but also diverts trade between non-members. Two main mechanisms appear to account for the EMI effect: namely, market enlargement and the integration of electricity markets.