Comparing the US and EU electricity markets

Electricity markets have been restructured in many countries around the globe. There is a variety of different designs, and the differences can significantly affect our ability to handle new challenges, such as integrating high levels of renewables. What are the key differences between the US and EU electricity markets? I was able to pursue that question in depth during my research sabbatical at the Florence School of Regulation (FSR) last fall. It was one of the issues addressed in an online debate I had with Daniel Dobbeni, founding president of the European Network of Transmission System Operators (ENTSO-E). Below you can watch the full debate (55:12), hosted by FSR director Jean-Michel Glachant.

Highlights:

The definition of seams. Seams, we agreed, include the technical transmission limitations between regions (for example, between countries in Europe and between ISOs in the US) as well as the regulatory and market differences between these regions. Mr. Dobbeni observed that the long-life of electricity system assets together with the history of development in European countries have played an important part in forming these seams, but that they are evolving with the advent of system changes, including renewables. He advocated for removing the seams, and I agreed.

I argued for a consistent architecture to be applied across as large an area as possible, observing that such consistency was perhaps even more important than, for example, whether or not the market design was nodal (as in the US) or zonal (as in the EU). I mentioned that there were still significant seams at the day-ahead level in the US, particularly in the west, and to a lesser extent in the east, where there are several large ISOs with seams between them. There still remain significant technical seams due to limited transmission between the west, the ERCOT part of Texas, and the east. In the EU, the EU Pan-European Hybrid Electricity Market (EUPHEMIA) has removed seams due to market differences in the day-ahead level across many countries through so-called “market coupling” between the regions.

Mr. Dobbeni observed that seams should also eventually be removed in the intraday markets, which are in place in Europe but not the US, and that he was concerned about the technical difficulty of market coupling in balancing markets. I discussed what I understand is the fundamental philosophical difference between US markets and EU markets: in the US, the real-time market is the “final” market; in the EU, the day-ahead market plays most of this role, with the so-called balancing market at least historically being more akin to the deployment of ancillary services in a US-style market. Moreover, I commented on the need to reach geographical scale to enable real-time management of congestion issues such as loop flow.

Mr. Dobbeni emphasized that congestion management was being complicated by the increase in renewables. In addition, he observed that congestion management across borders was particularly complicated and that US-style ISOs that spanned borders were able to consider overall issues in a way that was difficult for the EU-style markets at the country level. He advocated for the enlargement of regions beyond member states, enabling balancing beyond individual states, with which I definitely agreed!

US RTOs and some larger European countries, I observed, are likely at a large enough geographical scale to effectively balance renewables. We agreed that reducing the effect of technical and regulatory borders between regions was desirable to help with balancing renewables, but that it might be difficult to imagine, for example, amalgamating PJM and MISO in the US for various political reasons. Analogous difficulties apply in the EU.

In response to a question from a listener, Mr. Dobbeni mentioned the organizational differences between the EU and US: in the former, the TSO owns assets and operates the market; in the latter, there is a separation of ownership of transmission and operation of the market.

A question was posed about interconnectors, and I responded that building transmission across borders in the US was a challenge, and that this posed particular difficulties in building transmission between renewable-rich regions and population centers in different states. In the EU, security of supply is particularly important in the context of interconnectors between countries, whereas this is less pressing in the US.

We also recognized that energy prices are not bringing forth new capacity, and that prices are more uncertain than in the past. Consequently, even though we both were skeptical about capacity markets, there is evidently a problem. Mr. Dobbeni observed that, while there was overall a very large generation capacity in the EU, there are regional variations in capacity and many uncertainties in the long term. Restructuring in the US, I added, had focused on the generation-side. Now we need more participation by the demand-side in the market as part of the solution to the market providing the right amount of capacity. I also emphasized that the next five years will be the test of the ERCOT energy-only market.