Devising a sound regional approach in cross-border capacity allocation

In the last years, the integration of the European electricity markets belonging to the so-called Internal Electricity Market has been continually discussed. In this frame, the implementation of a unified methodology for allocating interconnection capacity is one of the most significant topics. Since IEM is (and will stay, at least in the short term) constituted by a set of independent entities featuring quite different market models, the most viable solution seems to be resorting to co-ordinated methodologies that allow each market to clear prices and quantities following its own rules but, at the same time, provide a common allocation procedure for cross-border capacity. Thus, both explicit (co-ordinated auctions) and implicit (de-centralized market-coupling) methodologies have been proposed. This paper shows that both approaches are subject to drawbacks. Co-ordinated auctions are liable to the exercise of market power. Market coupling is less subject to this problem, but care must be taken in order to devise an algorithm capable to be gradually extended up to cover the entire IEM area.