Abstract:
“Market Integration and Market Efficiency: Evidence from Transmission Constraints in the Belgian Electricity Sector”
Charlotte De Cannière* (Toulouse School of Economics)
Electricity systems are undergoing a structural change, with a growing share of generation coming from renewable sources located away from major demand centers. As a result, the efficient operation of transmission networks plays a central role in ensuring well-functioning electricity markets. This paper studies how European regulatory constraints in transmission allocation affect market efficiency. A key feature of the current system is that internal power flows in one country can spill over onto neighboring grids and, because they receive priority, take up cross-border transmission capacity. When this happens, cross-border trade is crowded out, gains from trade are left unrealized, and domestic producers face weaker competitive pressure, creating scope for market power. Using detailed data from the Belgian electricity market, I show that these episodes lead to sizable efficiency losses. Production shifts strategically toward higher-cost domestic generation and trade flows decline sharply. Overall, the results highlight that market integration depends not only on physical interconnection, but also on the design of transmission allocation rules. Inefficient use of available capacity can generate substantial welfare losses, even in well-interconnected systems.
*Denotes presenter