Introduction

Background

The European Union (EU) sees the integration of its national electricity transmission networks into a single European energy market as a key enabler of competition and in general of the long-term improvement of social welfare in the Eurozone. Taking a resolute step in this direction was already the objective in 2002, when the Barcelona European Council set a target for the installed interconnection capacity in 2005 of 10% of the existing production capacity, even across borders where congestion was not a concern at the time [1]. It has been argued in several fora that this policy target has failed to be met. Until recently, most European countries still featured low interconnection capacities, regardless of the capacity of their internal electricity transmission networks: the cross-border transmission bottlenecks that existed in 1996 were still present in 2007; up to 2004, only 4% of the electricity transmission investment was being directed to interconnections; and an interconnection priority project presented by the European Commission largely underestimated the required investments [2]. In the EU, the most important bottlenecks have been four regions whose interconnection capacity with mainland Europe is clearly insufficient: the Baltic States, the Iberian Peninsula, Italy, and Great Britain and Ireland. These “electric peninsulas” have a high renewable generation development potential, which will be constrained in the long-term if interconnection capacity is not increased up to 10 times, in the case of the Iberian Peninsula’s connection to mainland Europe, or at least doubled, in the other regions [3]. The interdependencies between national energy markets and Transmission System Operators (TSOs) in the EU have increased significantly in recent years, for the most part due to the significant development of renewable energy sources and the ongoing efforts to liberalize the EU electricity market. Cross-border power flow growth can only be appropriately supported if an adequate electricity interconnection structure is in place [4]. The management of cross-border flows can be implemented through the auctioning of transmission rights, although Joskow and Tirole [6] have shown that this mechanism results in a higher market power for generation in the importer. The EU started by using non-market-based methods to manage cross-border congestion, such as access limitation, priority listing, and pro-rata rationing. Currently, prices are set implicitly through market coupling. Market-based methods have the advantage of providing reliable economic signs of the need for interconnection expansions [5]. Market coupling allows interconnection flows to be managed in a joint regional Power Exchange (PX) that dispatches power based on demand and available interconnection capacity. In the EU, seven PXs have joined efforts to launch the Price Coupling of Regions (PCR) initiative, with the objective of devising a single price coupling solution to define electricity prices and manage cross-border capacity in Europe. The most important step in this direction was the launch of the NorthWestern Europe Day Ahead (NWE DA) initiative, a day ahead market coupling implementation that went live in February 2014, accounting for more than 75% of the total electricity consumption in Europe. This initiative was supported by the European Network of Transmission System Operators for Electricity (ENTSO-E) and coordinates the TSOs and PXs of Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Latvia, Lithuania, Luxembourg, Netherlands, Norway, Poland and Sweden.