Cross-border electricity trading modelling: a market equilibrium approach Félix Fernández-Menéndez 1 , Begoña Vitoriano 1 , Julián Barquín 1 1 Instituto de Investigación Tecnológica Universidad Pontificia de Comillas de Madrid C/ Alberto Aguilera 23 – 28015 Madrid (Spain) Tel.:+34 91 542 28 00, fax:+34 91 542 31 76, e-mail: Felix.Fernandez@iit.upco.es Abstract. It is widely accepted that generation operation planning can be advantageously modelled through market equilibrium representation. When several areas or countries are intended to function as a whole market, cross-border congested lines require implementation of a management methodology. Of the ones proposed in the literature, this paper is focused on market splitting and explicit auctions. A model equilibrium approach is presented to represent both congestion management methods through an equivalent optimisation problem. All the analysis is made for a two areas market scenario and mainly focused to the medium term. The proposed modelling not only allows theoretical studies, but also practical analysis of real-world systems including a detailed representation of their characteristics. Keywords Power system economics, interconnected power systems, congestion management, market equilibrium, cross border electricity trading. 1. Introduction The European electric power system, initially interconnected for reliability reasons, then used also for commercial purposes through well-defined exchange contracts (mostly long term contracts), is now the theatre for a more complex European market. Congestion management has a strong impact on both power system security and market liquidity. Models to simulate the results of the different proposals for congestion management in the medium-term are crucial to determine how they can affect the generation scheduling in competitive environments. In Europe, nowadays, are operative several methods to solve cross border transmission limitations [1]. Although very often, ad-hoc procedures have been applied, current trends favour a more systematic approach. In that sense, two of the main alternatives are based on implicit or explicit auctions. In absence of strategic behaviour, both methods should yield, in equilibrium, the same results. Therefore, adoption of one or another should be based mainly on issues related to its operational convenience. However, existence of market power can lead to very different outcomes. The aim of this paper is to compute the market equilibrium achieved with the different proposals for congestion management in cross border transactions considering oligopolistic behaviour in the medium-term. With those results it can be determined the actual market power each competitor can exercise in each case, in order to determine which proposals are performing best the objectives they were designed for [2]. There are different approaches to solve the market equilibrium for medium term. One of them is based on solving an equivalent quadratic optimisation problem. This approach has been proved to be suitable to simulate real cases very efficiently [3]. The changes to be made over this model in order to simulate electricity markets assuming both main frameworks of regulation, implicit and explicit auctions, are presented in this paper. There are two main differences when solving congestions by market splitting or by explicit auction. First, with market splitting each agent have to make a hypothesis about the state of the transmission line (congested or not) and each agent is paid by the production in an area at the price in that area. Second, with explicit auction the auction takes place before clearing the market, so we have two stages. Also in general there will be a price to pay for the use of the interconnection, and each agent is paid by the sales in an area at the price in that area.