Lacking Balancing Market Harmonisation in Europe: Room for Trader Profits at the Expense of Economic Efficiency?

Following several regional initiatives on the day-ahead and intra-day stage, integrating real-time balancing markets constitutes a logical next step in the process towards an Internal Electricity Market (IEM) in Europe. So far, real-time balancing market designs significantly differ between European countries and a coordinated approach for cross-border exchange of balancing services is non-existent. This paper aims to illustrate that the current lack of balancing market harmonisation – in combination with an increasingly integrated day-ahead and intra-day trade – can be profitably exploited by traders. More specifically, trading strategies taking advantage of structural design differences in the imbalance settlement of two countries are identified and assessed. The paper analyses detailed data of the Belgian and French power system using statistics in order to verify the profitability of different trading strategies between both countries. Some of the identified trading strategies are found to be significantly profitable; others turn out to be loss-making. On average, France was the most attractive country for traders to be long in 2008; Belgium to be short. Profitable trading strategies can usally be carried out without any expense as cross-border capacities available at the intra-day stage are currently far from being used and no value is attributed to them. However, some profitable trading activities resulting from market design imperfections may induce economic inefficiencies.status: publishe