Mitigating market power in electricity networks

The paper concentrates on four aspects of mitigating market power in European electricity networks: capacity divestiture, entry, promoting interconnection, and the capacity to regulate competition in generation, drawing on lessons from Britain, California and the Continent. Each of these actions can improve the intensity of competition in electricity wholesale markets, but attractive strategies to promote any one of these may, unless carefully designed, be in conflict with other strategies, with possibly long-term disadvantages. Trading divestiture for the right to vertically integrate, or promoting contracts at the expense of a transparent spot and balancing market may increase short-run competition at the expense of entry. Gas liberalisation would greatly facilitate efficient electricity markets.