Impacts of unilateral capacity remunerative mechanisms on cross-border electricity trade

This paper focuses on the impacts of capacity remunerative mechanisms (CRMs) on electricity cross-border trade. As an example case, we focus on the cross-border electricity trade between the Nordic and Russian electricity markets. These two markets have distinctively different market designs. The Nordic market is an energy-only market that rewards the electricity generators for the output they produce. The Russian market rewards generators for the output and availability of electricity generation. We analyse the prospects for the cross-border electricity trade between the two markets. Our findings suggest that the different market designs notably reduce the cross-border electricity trade between the two markets and also have significant impacts on the distribution of welfare amongst the consumers and producers. These results have significant implications because many European countries are currently considering unilateral CRMs. An obvious threat is that the particularly uncoordinated CRMs cause impediments to the cross-border electricity trade, and result in inefficient use of the interconnectors. Such a development could severely hinder the achievement of the internal electricity market in Europe.