Optimal Transmission Regulation in an Integrated Energy Market

Abstract

The capacity of the transmission network determines the extent of integration of a multi-national energy market. Cross-border externalities render coordination of network capacity valuable. Is it then optimal to collect powers in the hands of a single regulator? Should a common system operator manage the entire network? I show that optimal network structure depends on (i) how the common regulator would balance the interests of the different member states; (ii) how the gains from market integration vary across countries; (iii) network characteristics (substitutability versus complementarity); and (iv) the social cost of operator rent.

Keywords: Multi-national energy market, transmission, supranational regulation, system operation, multi-contracting

JEL Classification: D62, D82, L51, L94