Edited by Per-Olov Johansson and Bengt Kriström
Chapter 6: Energy in a Bathtub: Electricity Trade between Countries with Different Generation Technologies
Finn R. Førsund 1. INTRODUCTION Technology and economics of long-distance transmission are no longer obstacles to expanding trade in electricity across national borders. There has been a common international market, Nord Pool, between the Nordic countries since 1996 and international trade now takes place between many European countries on a bilateral basis, for example, France– England, France–Italy (Italy imports about 20 per cent of its electricity), Germany–Holland, and so on. The energy policy of the European Union is encouraging a gradual expansion of cross-border trading and integration of electricity markets (Jamasb and Pollit, 2005). Self-sufficiency in electricity generation has been the rule in the past and has created country-specific prices that have influenced the structure of industry and, for example, choice of space-heating technology. This has been the case for Norway, which developed a huge metal smelting industry after World War II, and also in an international context, basing a significant share of space-heating on direct use of electricity. It is therefore of interest to study what happens with the price formation in domestic markets when borders are opened up for trade in electricity. The objective of this chapter is to study, within a highly stylized model of trade in electricity between two countries, the price formation and quantities of electricity following trade, and contrast this with the situation of autarky for both countries. Because hydropower has some unique features and because most systems are dominated by thermal power, price formation in markets dominated by hydropower is...
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