Measuring inefficiency in international electricity trading

Abstract

Interconnectors reduce the cost of supplying electricity if they are operated efficiently. We show that established metrics which are used to monitor electricity trading inefficiency are inaccurate for several typical trading conditions. We propose two new metrics—the Unweighted and Price-Weighted Inefficient Interconnector Utilisation indices—to address these deficiencies. These metrics are substantially more accurate than existing ones and perform equally well whether or not interconnected markets have coupled trading. Our analyses show a substantial decrease in inefficient trading between Great Britain (GB) and both France and the Netherlands after the European Union's market coupling regulations were introduced in 2014.In view of the UK's withdrawal from the European Union, we evaluate how uncoupling GB's market would affect cross-border trade. We find that uncoupling would lead to inefficiencies in trade, with the electricity price differential between GB and France (Netherlands) rising by 2% (0.6%), net imports into GB decreasing by 22% (6%), congestion income decreasing by 6% (1.5%), and infra-marginal surplus decreasing by 25% (9%). Should the EU decide to implement an equivalent carbon tax to GB's Carbon Price Floor, congestion income would decrease. Uncoupling markets would magnify this decrease.