Regional Initiative: Which Appropriate Market Design?

The European Union has a long experience and many success stories when it comes both to build a
borderless Europe and to ensure that benefits are fairly distributed among producers and end-use
customers. In some sectors results and benefits arise quickly, but sometimes borders remain difficult to
cross despite numerous initiatives. A typical example of this is the completion of the single market for
electricity. The process has been ongoing since the early 1990s and major progress has been made.
However, we are still far from a borderless and truly competitive electricity market across Europe. A
new legislative framework, the Third Package, will enter into force shortly and yield strong
expectations. However, growing concerns become apparent among policy makers and in the market
place on its ability to effectively foster the completion of the internal market and tackle market power
issues. This paper argues that the approach adopted in the Third Package is not adapted to the
challenges the European Union faces in electricity. The current lack of focus on implementing a better
market design architecture leads the EU regulatory framework to overlooks important issues such as
the promotion of power exchanges. The paper reviews the current state of the art on ‘smart’ market
design in the economic literature and confronts it with the concrete experiences pursued at the regional
level, in the European Union and beyond. Some of the issues discussed in depth include the TSOs’
roles and institutional design, generation adequacy and the design of capacity mechanisms and the
development of demand-side response programs. It shows that the EU should learn from some of the
on-going initiatives pursued at the domestic and regional level and that a sound market design based
on a pool/TSO central dispatch is probably the way forward.