Electricity Prices and Cross-border Trade: Volume and Strategy Effects

In this paper we derive equilibrium bid functions in isolated domestic electricity markets and then analyse their modifications when cross-border trade among them is managed using the implicit auction method. We show that cross-border trade can induce price convergence across countries and thereby reallocate gains and losses as a result of two concomitant effects: a ¿volume¿ effect due to the mere increase/decrease of demand and supply in each market and a ¿bid effect¿ due to the modifications of bid functions brought about by interconnection. The latter effect can either contrast or reinforce the former. We derive conditions affecting the net result.