Electricity Trading in Energy Market Integration: A Theoretical Review

Abstract

This paper surveys theory and practice on how a larger and integrated energy market can propel electricity trading through economies of scale. We make a systematic presentation of theories and methods used by various scholars to generate knowledge on integrated electricity markets. We discuss paradigms, concepts, and practices emanating from the complex topic of a unified electricity market with an intent to identify gaps. We conclude that electricity trading in EMI has a propensity to drive both economic integration and sustainable energy access; that crafting ways and means for integrating cross-border systems without sacrificing the local economy could make the idea of EMI more palatable to partner countries; and that adoption of ex ante studies that are non-data oriented could improve the design of upcoming regional electricity markets.

1. Introduction

In its early stages, the power generation industry was geared towards serving the needs of industrial manufacturers. Economies of scale began to drive the sector, with privately owned and vertically integrated electric utility companies co-existing. With demand for power increasing, operators (public and private) grew in number and size to better serve the needs of manufacturers, urban settlements, and public service institutions [1]. In the contemporary world, electricity is a basic requirement for any community’s social and economic wellbeing [2].

The transformation ushered in new managerial concerns, with the need to regulate the market, promote competition [3], raise resources for investment, achieve universal access to energy needs, and redesign energy market institutional frameworks.

The IEA report [4], sets out energy sector objectives that include boosting access, increasing uptake, improving reliability, and raising positive impacts of the electricity sector. To realize these objectives, Blimpo and Cosgrove-Davies [5] proposed the following five policy considerations to guide energy sector planning: (1) recognize that electrification is a long-term investment and a necessary input for economic transformation; (2) address demand constraints at all stages of the electrification process; (3) target and promote productive use of electricity to raise household income and ability to pay; (4) prioritize reliability such that access rates alone are not the sole measure of progress; (5) coordinate regional markets to take advantage of complementarities for trade as a means to energy security. This paper concerns itself with the fifth policy proposal by addressing the fundamental question of how an effective regional electricity market can be established.

Different scholars have focused on energy markets operating in various parts of the world. Furthermore, various theories and paradigms have been formed surrounding the rationale, constraints, and achievements of energy market integration. In practice, different models apply in different localities, and the period of existence affects the evolution processes of integrating markets differently. While the available theoretical and practical literature provides a diversity of knowledge, it presents some navigational challenges for scholars attempting to study upcoming energy markets, since there is no agreed-upon ‘blueprint’ for design, process, or application of a regional electricity market.

The geographical scope of the present work focuses on the East Africa region energy market integration, which, according to a preliminary scan of the literature, is envisaged to provide a solution to the region’s problem of electricity supply–demand disequilibrium. However, since the East Africa Community energy market integration is an upcoming market, there is no obvious entry point for coherent investigation into whether it can solve the region’s energy challenges. Therefore, there is a need to synthesize the literature to identify the relative variables that define the topic of electricity trading in a regional market, to examine how regional electricity trading is viewed by scholars, and to understand the methodologies used. The argument in this paper is that electricity trading is a sustainable rationale for energy market integration. We employ systematic document analysis to identify the theoretical reasoning about electricity trading in an integrated energy market that could inform prospective studies on EAC—the East Africa Community (EAC), which is an economic bloc for seven countries: Burundi, Kenya, Democratic Republic of Congo, Rwanda, South Sudan, Tanzania, and Uganda [6].

The rest of the paper is organized into sections—methodology in Section 2, discussion of results in Section 3, while Section 4 synthesizes conclusions on the topic.

2. Methodology

2.1. Systematic Review and Key Research Questions of the Paper

A systematic review method extracts and interprets data from published studies on the topic and analyzes and summarizes interpretations of findings into logical conclusions [7]. The choice of the method is based on the need to establish the state of existing knowledge. The main research questions addressed in this paper are:

RQ1.

What are the ongoing debates on the topic of electricity trading in a regional market?

RQ2.

What theories describe electricity trading in a regional energy market?

RQ3.

What are the key concepts and practices documented by previous studies on the topic of electricity trading in an integrated electricity market?

RQ4.

What research methods have been used in studies on electricity trading in an integrated energy market?

2.2. Inclusion and Exclusion Criteria

This review specifically focuses on scientific knowledge about three study variables—market governance, power pooling, and electricity pricing—in an integrated energy market. Much of the analyzed data and information has been chosen from studies and reports made on energy markets in Europe, the United States of America (USA), Asia, and Africa. On that basis, the following four criteria are used to identify and select relevant scientific studies for inclusion or exclusion from the scope of the review.

i.

Subject relevance: studies that in part or fully deal with electricity market governance, electric power pooling, and electricity pricing.

ii.

Level of market: studies that concern themselves with regional markets with a framework of cooperation for electricity trading. We excluded studies of domestic markets for regional member states and bilateral trade markets because they are treated by this study as processes for integrated markets upon harmonization of the various domestic frameworks.

iii.

Geographical scope: studies conducted in USA, Europe, Asia, Latin America, and Africa on the topic of regional energy market integration.

iv.

Type of data: studies of both quantitative and qualitative analysis type.

2.3. Data Sources

A search for relevant material was carried out using websites of various academic and development agencies, internet search engines, and databases of journal publishers. Published scientific papers were searched through websites of e-journals. The main keywords and phrases searched include (i) energy market integration, (ii) electricity market governance, (iii) regional power pool, and (iv) electricity pricing in integrated markets.

2.4. Search Strategy

The search strategy was based on the key variables in each research question. The systematic selection tree method used in Figure 1, Figure 2, Figure 3 and Figure 4 depicts how literature was navigated to identify the variables of concern in the respective research question raised in Section 2.1 above. The number in brackets indicates the number of publications reviewed for that specific category of literature.

2.5. Identification and Selection of Review Studies

A comprehensive literature search was done using a general–specific synthesis. We started with identification of 213 potential records that were subjected to first stage screening for duplication and title relatedness. At this level, 109 records were eliminated. In the second stage, abstracts, executive summaries, and conclusions of the remaining 104 documents were perused and assessed for the inclusion and exclusion criteria presented in Section 2.2 using the strategy demonstrated in Section 2.4. Subsequently, full-text evaluation was conducted on 66 records that informed this systematic review.

2.6. Quality Assessment and Data Extraction

Objective and subjective evaluation criteria were applied to assess and determine the quality of the studies and reports. The quality criteria included the theoretical basis and relevance of the research, research methodology and design, reliability of data sources, and quality of the analysis. Both qualitative and quantitative data related to the research questions of this review were systematically analyzed.

3. Results and Discussion

The key findings from our review of the literature are presented under four themes: debates and perspectives, theories and paradigms, concepts and practices, and methodological triangulation.

3.1. Debates and Perspectives

Debates about electricity as a utility come from perspectives on whether it is a public good or a market good. The ‘public good’ view holds that electricity is a basic requirement for any community, as it can improve living standards via provision of health education and mobility services [2]. According to [8,9], electricity is evolving from being more of a public good to more of a market good. This is because supply inelasticity associated with public good provision has made it difficult to meet the vast elastic demand for electricity in the developing world. Electricity is now coded in the international system of trading and is analyzed by development indices. However, the electricity market is complicated. It includes lengthy debates about market regulation versus deregulation, monopolies versus competition, and who should be responsible for generation, transmission, and distribution of power.

In this section, we explore the debates about the topic of electricity trading in an integrated energy market. The debate about whether economic rationale lies with the domestic market or the regional market for sustainable energy supply seems to have been settled by strong affirmation for a wider regional market.

Table 1. A summary of costs and benefits of integrating energy markets [10,11,12,13,14,15,16,17,18].

Benefits

Costs/Constraints

Provides a foundation for a regional union as whole and strengthens a region’s competitiveness [10]. Social welfare accrued through harmonized wholesale energy prices [11]. A more open power market encourages development of renewable sources of energy [13]. Allows access to the lowest cost resources and reduces the cost of ensuring security [15]. Provides significant opportunities for trading to exploit relative price differentials from the different marginal generation technologies [16]. The total economic surplus is maximized as the most expensive energy is displaced [17]. Offers opportunity for non-coincident peaks in demand and sharing of reserve capacity [16]. Increases the number of firms competing in wholesale and retail markets [16]. EMI can help reduce the energy demand pressure and smooth the demand shock through decreasing income elasticity and increasing price elasticity, particularly in the long run ([17]).

Offsets ‘third’ country energy source benefits (trade diversion) [10]. Market integration requires a set of agreements that may be very complex to arrive at and consistently adhere to [12]. The complexity towards dealing with regulatory authorities in multiple member countries, especially if those authorities were designed before integration [14]. The effort by each member of the pool to maximize its savings in the integration (ensuring a ‘win–win’ situation) is difficult. The opposition of pool members to give up their rights to engage in independent transactions outside the pool. Cost associated with establishing central dispatch unit and the needed communication and computational facilities. Network infrastructure requires heavy investment that may not be feasible in short and medium terms [18].

Source: Authors’ compilation.

presents a summary of views on possible costs and benefits of energy market integration.

Opening domestic markets to participation in regional markets can take the form of bi-lateral or multi-lateral trading with neighbors, but without necessarily integrating these markets under common rules. This review finds some associative merit to lateral trading in respect to direct decision-making on infrastructure outlay, no costs to regional regulatory authority, and relatively more revenue to the exporting country; however, there is evidence that lateral electricity trading has higher economic costs and risks compared to an integrated energy market [9]. The unsettled debate is on which approach delivers an effective integrated energy market. Two philosophical views, still in existence, are briefly highlighted as follows.

3.1.1. ‘The Bigger the Better’ versus ‘the More Manageable the Better’ Debate

Regional energy policy is wide and complex. It considers market management, energy production, regional trade, and the cautious strategy of minimizing exploration and production of hydrocarbons [19].

The emergence of an integrated energy market approach to solving energy security challenges has been associated with a couple of other benefits, including economies of scale, cost reduction, and efficient allocation of a region’s resources [1]. However, a fundamental question arises to the effect of ‘What size of integrated energy market is right to optimize sustainable integration benefits?’ Several viewpoints have been put forth by different scholars in an attempt to answer this question. The common angle involves proponents of trade economics and managerial economics. The trade economics viewpoint (such as [10]) suggests that EMI should adhere to the logical principle of ‘the bigger the better’. This view underscores the importance of economies of scale in driving integration. It is held that once markets are functional, economies of scale will always smooth out possible constraints reactively [10]. On the other hand, managerial economics (such as [20]) espouses a cost argument whose logic is similar to ‘biting off what one can chew’. According to the managerial economics viewpoint, territorial growth ought to be synonymous with the required investment for interconnectivity, system control, and review of domestic policies to harmonize at the EMI level. Therefore, economies of scale can only be harnessed after such investments have been efficiently utilized. This perspective adheres to a step-wise approach that starts with bi-lateral connections, through to sub-pools, and then regional pools as the logical roadmap to arriving at an effective EMI.

While we appreciate the merits of both arguments, further interests tilt towards the managerial perspective and therefore we chose to study the East Africa Community Power Pool (EACPP)—member states: Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda—as a sub-pool for the greater Eastern Africa Power Pool (EAPP), whose countries are Burundi, Djibouti, Democratic Republic of Congo, (DRC), Rwanda, Egypt, Ethiopia, Kenya, Sudan, Uganda, and Libya. This choice allows us to underscore how the existence of a general common market has enhanced electricity trading in the East Africa community. The fact that EACPP has an existing regional cooperation framework under EAC presents an opportunity for it to be better managed and rationalizes the scope of the overall study, of which this paper is a part.

3.1.2. Economic Community versus Energy Community Debate

A scholarly question arises as to which of the two possible approaches (economic community first, or energy community first) is more effective at widening opportunities for electricity trading, that is: ‘electricity market evolving from an existing economic bloc, or leveraging an existing energy market to attract membership for a bigger economic bloc?’ The economic integration argument perceives the single market desired for electricity trading as part of the economic union stage of overall integration, where all tariffs are removed, policies are harmonized, and factors of production are free to move between member states to create a uniform (single) market. This perspective involves maximum economies of scale because of an economy functioning as whole. Otherwise, mere attainment of an electricity single market may not be enough to guarantee maximum absorption capacity for the aggregated power supply, however cheap it may be. Direct focus on custom union policy interventions that designers of the energy market integration advocate for is the circumvention of the initial stages of economic integration. Therefore, implementation challenges such as mistrust, lack of commitment, and fears about sovereignty epitomize most of the up-and-coming EMIs [13]. This is results in overstepping the logical process of building economic integration. In essence, such challenges are dealt with in early stages of federating. This view addresses electricity as any other good, such that the associated unique properties and preferential treatment required can best be dealt with at the operations level.

On the other hand, the energy community proposition argues that the regional bloc agenda is at times too wide for split efforts to simultaneously achieve all goals. Electricity is viewed as a catalyst for growth that has to be prioritized. An existing economic community possibly ensnared in trade politics may jeopardize an energy security agenda that believes electricity is a necessity for growth rather than for trade. Much as an existing economic bloc may function as an agglomerative magnet to attract other countries to join [21], it is equally susceptible to being an agglomerative repellant if power is misused to overstep interests of potential members in the energy market. In case of Europe, at the start of electricity market reforms in 1996, the EU included 15 countries, but there were 27 countries sharing power networks. In 2005, the EU signed a power treaty with several countries from southeast Europe that were not yet part of the EU [21].

This debate is important to the study of ‘electricity trading in EAC market integration’ for two reasons: first, the East African Community as regional economic bloc existed before the greater EAPP energy market, of which EACPP is a sub-pool; second, whether economic community or energy community is put first, they both face similar opportunity cost in terms of sovereignty, and their implementation complexities increase with the level of integration.

3.1.3. The Electricity Trading ‘Ecosystem’ Debate

The burgeoning literature on energy law and policy depicts a divergence of views on the kind of a market structure that is effective for electricity trading. Commonly discussed viewpoints are the utility business model and the free trade model.

The utility business model (regulatory) views the electricity trading system as a complex and costly venture only achievable through long-term planning and investment in generation, transmission, and distribution guided by central utility agencies. Attainment of a functional electricity system and spontaneous profit is complex and often conflicting. Therefore, electricity trading should be viewed as part of a tail-end possibility arising from domestic surpluses [22].

The free trade model advanced by Utah Law Review argues that the utility business model is stacked towards a unidirectional flow of electricity [23]. The arrival of small renewable additions through solar, wind, and other distributed energy resources owned by customers is an effective strategy for solicitation of investment and elimination of centralized utility induced trade barriers. An effective electricity trading ecosystem is one that connects many different persons and entities through a wide range of interactions across the electric grid. The free model paradigm is viewed to enable more innovative transactions among more nontraditional actors. Cross-border electricity trading is perceived to be part of the business ecosystem in which a well-developed system for domestic sale is more likely to trigger cross-border sales than vice versa. The basic drawback to this paradigm is that the larger the number of stakes in the grid supply, the higher the price incidence.

As much as authors appreciate the proposed new trading paradigm for electric power that promotes greater competition and innovation across the value chain, they also recognize the need for a continued, albeit modernized, role for utility incumbents.

3.2. Theories and Paradigms

This section presents theories under two themes: theories on trade and theories on energy market integration.

3.2.1. Trade Theories

The evolution of the global economy has triggered changes in trends of global trade. Subsequently a series of perspectives and models has emerged over time to contextualize such developments. A survey of trade theories by [24] provides factor-based nomenclature that classifies these theories as traditional trade theories, modern trade theories, neo-technological theories, and growth theories.

Traditional theories, which include classical theory by Smith and Ricardo [25] and neo-classical theory by Heckscher–Ohlin–Samuelson [26], focus on the comparative advantage arising from endowment factors and technological differences between countries (relative efficiency gap) as the cause of trade, aiming at filling those gaps. Since the relative efficiency gap is not the same for all goods, trade negotiations strive to delineate how to close these gaps product by product. The modern trade theories, supported by [27,28,29], emphasize increasing returns to scale and internal economies of scale as the trigger for trade. This school of thought identifies market imperfections to be the key determinant beyond factor endowment and technology but still perceives trade as only unidirectional.

Neo-technological theories contributed by [30,31,32], explain trade pattern in terms of technological progress gaps as the cause of reduction in costs of production and generation of new products. However, since technology is not free nor instantaneous, the comparative advantage can only be a temporary situation to allow for possibilities of multi-directional trade in the long run. The growth theories by [33,34], view trade in a dynamic context. Their perspective assumes two approaches: first, that trade dynamics cause an externality effect (learning by doing effects) whereby products of given activity cause growth and external economies of scale; and second, that technological progress is an intentional outcome in which countries must invest. This view accounts for trade treatment (negotiations) and how to address market imperfections.

Overall, trade theories underpin two important aspects of electricity trading, namely trade pattern and trade implications. Whereas trade policy concerns itself with mechanisms to increase terms of trade as a sufficient condition, it must address market management to ensure positive implication to welfare as a necessary condition. Deducing from these theories, aspects of protectionism, industrial policy, and reciprocal treatment are reactionary behaviors to trade implications for a given country. Therefore, trade arrangements such as bilateral and regional blocs are a practice of market conditioning for productive trade.

3.2.2. Energy Market Integration Theories

A host of theories provides supportive knowledge on the rationale for energy market integration. This study reviews three theories—classical development theory, energy security theory, and regional growth convergence theory—based on their relatedness to the study variables of electricity market governance, power pool, and electricity pricing.

The classical development theory (by [35]) asserts that economic development of a country consists of stages: agricultural stage, industrialization stage, commercialization stage, and advance stage. The theory identifies two forces for such transformation, namely, the endogenous catalytic force that propels the internal process and the external force absorbing the proceeds of each stage. The classical development theory identifies energy, technology, and resource base as drivers of the endogenous force, while market size, forward linkages, and stocks are the drivers of the exogenous force. Therefore, development strategy should strive to expound both forces synchronically. For instance, estimation of energy needs must depend on the projected development needs and vice versa.

The energy security theory advanced by [36] provides the rationale for energy market integration. The theory advances energy security as the cornerstone for energy market integration. The perspective treats other benefits and incentives of the integrated market such as energy efficiency, emergency response systems, reduction of carbon emission, and energy trading as strategies to achieve energy security. However, this school of thought falls short on what should be the final structure of energy market integration and does not provide sufficient guidance on how to attain an overall energy security objective. Even though varying models have been adopted across the globe (such as the European model, Scandinavian model, ESEAN model, and US-Canada model), each with specific applicability, there is vagueness on the efficient strategy of arriving at full integration on choice between a bottom-up approach or a top-down approach. Ref. [37] have used energy security theory to develop an energy market integration conceptual framework. The cross-cutting variables regardless of region-specific models are trade liberalization, investment liberalization, inter-linked regional infrastructure, the liberalization of domestic energy markets, and energy pricing.

The regional growth convergence theory by (such as [36]) holds that energy market integration narrows development gaps and facilitates growth convergence because less developed countries could benefit more than their rich counterpart countries, while reducing energy market volatility [38]. This view considers energy as more of a development catalyst than a tradable good. It estimates energy uses in a consuming country to be more important than revenues generated by countries investing in generation capacity.

3.2.3. Electricity Trading Theories

With the emergence of energy economics as a branch of both economics and engineering, conceptual building has been much more centered on commodity theory and pricing theory of energy sources. Based on a continuous time commodity model, [39] have advanced the electricity market theory that has two components: electricity commodity theory and electricity pricing theory. Given the focus of this paper, we concern ourselves more with electricity pricing theory than commodity theory.

The electricity price theory advanced by [40] provides the basis for spot electricity pricing design. The principle of spot pricing assumes that the hourly spot price is determined by the total demand by location, generation availability, and costs, including purchases from other utilities, transmission/distribution network availability, and losses. The hourly spot price is given by the marginal cost:

$${\mathsf{\beta }}_{k^{\left(t\right)}}{\mathsf{\beta }}_{k^{\left(t\right)}}=\frac{\mathsf{\delta }}{\mathsf{\delta }{k}^t}\left[\mathsf{\theta }\right]$$

(1)

where ${\mathsf{\beta }}_{k^{\left(t\right)}}$ is hourly spot price for kth customer at time t (USD/kWh); $\mathsf{\delta }{k}^t$ is demand of kth customer hour t (kWh), subject to constraints such as energy balance, generation limits, energy flows and losses, and line flow limits; and Ѳ is the total cost of providing energy to all consumers now and in future. Much as spot price is criticized for being based on social welfare maximization promoted by classical economics [41], it remains important for the operation and planning of electricity. The theory brings out some important variables for this study, including installed capacity, transmission losses, operating system efficiency, electricity price, and total demand.

3.3. Concepts and Practices in Energy Market Integration

This section discusses ideas and evidence generated on energy market integration and the three constructs used by this study to define it: market governance (MG), power pool (PP), and pricing convergence (PC).

The Concept of Energy Market Integration

Many definitions and constructs have been put forward in the literature about market integration. Taken together, two common definitions arise. First, the degree of market integration is identified with the level of inter-market price variance. If the price variance is large (in relative terms), then the market is poorly integrated. If the variance is small, the market is well integrated. Second, a regional market is said to be integrated if more than one arbitrager presents in the market and if they are acting efficiently in a sense that supposes a few conditions for perfect trading [42].

Conceptualization of an integrated energy market identifies five major building blocks [10], as summarized in

Table 2. Components of energy market integration.

Component	Description
Technical Integration	Integration of technical facilities for various partner states (zones) into a single complex for generation, transmission, and distribution of energy.
Technological Integration	Combination of individual technological systems into a single technological chain.
Functional Integration	Working towards a unified set of goals, criteria, and procedure harmonization.
Organizational Integration	Interaction of various participants and their concerted actions towards their goal achievement.
Information Integration	Creation and maintenance of a single integrated information base of energy metasystems.

.

3.4. Electricity Market Design

Electricity markets differ in their design in different regions. The differences arise from domestic markets in member states that are set differently and affected by different path-dependent reasons. In practice, the typology of market design points to zonal and nodal market models. The zonal model is where the entire market is divided into zones (whole country) to which a uniform price of electricity applies. Price differentiation between zones appears due to marginal transmission costs. On the other hand, the nodal model (locational) applies to a market where there is practically no exchange and transactions are managed by operator through a mechanism like auctioning, where individual suppliers submit their offers considering current prices, costs of future investments, and place of energy supply and consumption [43]. In the contemporary world of renewable energy revolution, nodal pricing is being preferred as it implies more generation through renewable sources at a decentralized level [23,44,45].

For successful integration to take place [20], one of the necessary conditions is harmonization of price regimes operated by domestic markets (price convergence). However, this raises the question of the ‘right price’ that member states should strive to converge to. In line with competitive trade theory [46], the right price is the ‘most efficient price’. According to the efficient market hypothesis (EMH), pricing is a function of available information [47] and, therefore, the most efficient price is the price composite of the available information underpinning the market. This hypothesis suggests three types of efficient market prices: (i) weak EMH, which assumes price as a function of only historical data; (ii) semi-strong EMH, which compounds historical prices and all publicly available information to determine market price; and (iii) strong EMH, which assumes prices as a function of historical prices, public information, and private information. An efficient price is the one that allocates resources in the most optimal way that accrues the welfare benefits of an integrated market to all participants in the market.

3.4.1. Concepts and Practices in Governance of Integrated Electricity Markets

Electricity markets are designed to provide a reliable power supply at the lowest cost to consumers. This can be achieved through twin goals: making the best use of existing resources and promoting efficient investment in new resources.

Electricity market design is not static, and new challenges emerge as the electricity industry transforms. Common across literature on the energy market is the fact that electrification is a long-term investment that lays the foundation for socioeconomic development. There are two forms of electricity market design: utility-controlled and competitive market. Whereas the utility-controlled design maintains the obligation of the state in delivery of electricity as a public good, the competitive market design is regarded highly for market governance and price mechanism for efficient allocation of regional energy resources [16]. However, both designs are found to be inadequate in appropriating a large infrastructure investment [14]. Given the potential to mobilize a large capital investment, Public Private Partnerships (PPPs) have been earmarked and encouraged to cushion infrastructure gaps where both utility-controlled and competitive market designs have had shortcomings [18].

Electricity-induced transformation in Africa requires greater commercial use of electricity [48], and rapid progress in electrification requires governments to rethink their strategies based on emerging megatrends, urbanization, technological changes, regional integration, and climate change [1]. Based on the scholarly debate about what steps markets have to take to become successful electricity trading markets, three steps are commonly mentioned ([20], [49]) as a logical roll-out towards maturity of EMI: electricity market development begins as a monopoly utility, then shifts to a power pool, and finally grows to a spot market. However, the effectiveness of the market at each stage of the transformational process depends on the form of the market that the process intends to deliver.

3.4.2. Features of the Electricity Market

Electricity markets deviate from standard markets and take two forms: wholesale and retail markets. The wholesale market is where the electricity generating sector is fully competitive with large companies (DisCos) and large customers as buyers. The retail market is one that allows customers both choice and retail competition [50]. Conscious design of a competitive market is necessary to induce short-term and long-term efficiencies, including incentives for investment in generation and transmission facilities taking center stage in electricity market governance. Uniquely, the non-storability characteristics of electricity have transactional implications that make it difficult to be band wagoned in general product negotiations and regional agreements.

Table 3. Differentiating electricity as a good from other general goods.

Unit of Analysis	Standard Products	Electricity
Supply side	Output can be stored or transformed.	Cannot be efficiently stored. Real time product. High level of externalities in transmission.
Demand side		Low elasticity of demand because of technical rigidities. Huge fluctuation in demand.
Technology	Technology is majorly concentrated at production level.	Multi-level technological concentration; generation, transmission, distribution, and use.
Indirect cost	Products are usually tangible with no supplementary costs of handling.	Non-tangibility attracts supplementary costs for transmission and use.

Source: Authors’ presentation.

describes the unique features of electricity as a tradable good.

3.5. The Key Functions of Market Governance in EMI

An effective power pool mitigates the risk associated with investments in the power sector and increases the opportunity for continued growth financing. Our review of the literature earmarks four key functions of market governance that facilitate realization of that goal: decision making, operations management, market coordination, and regulation.

3.5.1. Decision Making

Although the effectiveness of EMI is dependent on day-to-day operations management by the independent regional authority, powerful participants are decision makers back in the partner states and/or a body of political representatives in the region. This requires massive investment in cross-border infrastructure, involves choice of side of participation as net importer or net exporter, and implies promotion of competition and restructuring of domestic utilities to align with the regional legal and institutional framework [51]. All these yardsticks require strong decisions and seasoned political commitment to regional solutions.

Using game theory rooted in behavioral economics [52], the process of integrating energy markets is viewed as a practice of energy trade gaming that involves multiple players, conflict, choices, and decision-making. As shown in

Table 4. Stylized trade-off of exporters and importers in EMI.

Variable	EMI Net Exporter	EMI Net Importer
Key benefits	Revenue Job creation	Energy access Energy security
Preferential interests	Regional influence Disposal of surplus power Benefits from economies of scale Regional competitive advantage	Economic stability Circumvent heavy investment in energy cost and time Reverse trade for other products
Opportunity cost	Heavy investment in installed capacity, evacuation lines, and power exchange stations Domestic environmental degradation Peak demand shocks to domestic consumers Higher domestic prices in initial stages of integration (sales constraint).	Erosion of domestic incentive to generate own power
Risk	Overdependence on foreign market because of inelasticity to change power lines	Power sovereignty

Source: Authors’ illustration.

, integration of energy markets accrues varying interest to partner states. Some have more to gain from power pool trading than others. A respective member country’s contribution to collective action will depend on the cost and benefit analysis of their current and future commitments [12].

Such variations in national trade-offs can bog down the collective action required to achieve regional power objectives. The slow progress in the development of regional trading platforms and commercial transfer capacity is attributable to the fact that countries are willing to join power pools primarily for energy security rather than eroding domestic sovereignty into an open regional market [12]. Effective energy market governance is perceived by this study as managing adverse implications of such trade-offs.

3.5.2. Operations Management

Management in a domestic market affects overall energy market integration at the regional level. Ref. [20] emphasizes the use of integration shocks to measure the degree of integration operating in each region. An integration shock is a reform in one country that affects others. The higher the level of integration, the more significant the effect. Our review points out a set of functions of market management apparatus common in the world’s major electricity markets, in line with typology suggested previously by [53].

Table 5. Description of management function in EMI.

Market Management Function	Description of the Function
Setting market clearance prices	Authorities design frameworks for all possible pricing systems, ex ante pricing, ex post pricing, and bid pricing.
Securing generation availability	Put in place the necessary incentives for sufficient generation capacity that can meet the electricity demand of the region.
Managing transmission constraints	There are three approaches: (1) Post market settlement—the market prices are set without transmission constraint. Any additional costs incurred are added to the pool’s selling price shared by all users. (2) Market settlement—constraints are modeled in the price setting algorithms, resulting in zonal price variations. (3) Price settlement.
Enabling demand-side participation	A full set of bids from a large base of consumers/agents helps to balance generation.
Capturing data for settlements	Data support retrospective settlement, accuracy, and auditability because of the large sums of money involved in electricity trading.
Calculating payment	The intersection of sales and purchase curves depicts point of confirmed trading.

Source: Authors’ compilation.

presents the description of management function in EMI. In the integration process, the market management function is charged with facilitating fundamental policy reform that preconditions the establishment of a regional energy market [54]. The shift from domestic load factor constraint to regional power pool constraint is indeed a complex change that needs cautious management. Therefore, national policy has to commit to managing competition in wholesale markets.

Viewed as a process, the market governance task posed to regulatory authorities is dependent on the stage of market integration in which the region of concern is located. A review of major world electricity markets depicts five common initiatives [55] that are highlighted in

Table 6. Common stages of electricity market integration.

Stage 1:	Interconnection among neighboring countries with developed national markets
Stage 2:	Bilateral electricity exchange
Stage 3:	Expansion exchanges into sub-regional markets
Stage 4:	Harmonization of domestic reforms
Stage 5:	Alignment to international regulations, standards, and practices

Source: Authors’ presentation.

.

In the integration process, the market management function is charged with facilitating fundamental policy reform, preconditioning the establishment a of regional energy market [54]. The shift from domestic load factor constraints to regional power pool constraints is indeed a complex change that needs cautious management. The development of a power pool allows electric utilities to exchange power or transfer (wheel) power to another utility in either wholesale or retail transactions. Therefore, national policy has to commit to managing competition in wholesale markets.

3.5.3. Market Coordination

Market governance constitutes several layers of market design [49]: regulator, board, participant committees, market monitors, and system operators. An efficient market coordination framework is anchored on six drivers: price signal, energy contract, technological capacity, ancillary services, incentives, and communication. These drivers determine the prioritization of the market objectives and subsequently the kind of institutional framework needed to execute those objectives. This policy junction for energy market integration involves creation of a regional trade enhancement structure on top of the domestic market structure. According to the literature (such as [16], [20] and [54]), the common coordination structure includes Regional Transmission Organizations (RTOs), Load Serving Entities (LSEs), Independent Systems Operators (ISOs), and Market Monitors (MM). As indicated in

Table 7. Common institutional structure and coordination of electricity markets.

Power Operator	Common Abbreviation	Case Study	Principal Function
Independent System Operator	ISO	NGC of UK, CAISO Spain, Scandinavia, New York, PJM1, New England	An independent non-profit entity under control of a board representing all stakeholders overseen by the regulator. Operates a centralized spot market. Manages non-price effects as a non-discriminating monopoly. Facilitates private markets in allocating transmission rights and counter flows (Burger et al.; 2019).
Regional Transmission Organizations	RTO	USA (FERC)	Facilitates supply-demand processes. Independent from market participants. Appropriate scope of operations and regional configuration (Congress Reserve Service, 2017).
Systems Operator	SO	Argentina Australia	The system operators are separate from the ownership of the transmission. The transmission function remains with the old utilities (Malik, 2010).
Transmission System Operator	TSO	Central–Western Europe	Facilitating cross-border exchange for parties trading on the power exchange. Ensuring that networks always operate safely and reliably (European commission, 2014).
Bulk System Balancing Authority	BA	US, EU	Performs regulatory oversight over DSO and DER markets. Balances power at the transmission level. Ensures feasibility of power flow scheduled by generators, storage providers, aggregators, and retailers in the week- to day-ahead time frames. Issues security dispatch orders2 generated in real time to match supply and demand within system operating constraints.
Distribution System Operators	DSO	US, EU	Distribution level power balancing through aggregation of all demand with injection bids from DER and aggregators.
Distribution Energy Resource	DER	Domestic markets	Provides electricity services to end users. Helps improve outreach of price signals at the distribution level. Aims at maximizing the welfare system as a whole rather than for any one user at the expense of others.

Source: Authors’ compilation. 1—PJM is Pennsylvania–New Jersey–Maryland Interconnection. 2—Security dispatch orders are the shortest time scale decisions in a power system.

, different institutional frameworks apply in different geographical areas.

The formation of RTOs could increase efficiency in wholesale markets and lower end-use prices to consumers. RTOs are the facilitators of supply and demand of electricity in EMI. They buy electricity from Load Serving Entities (LSE) that generate and sell to end users. Independent System Operators (ISOs) promote competition in the wholesale electricity market by widening supply options. The Federal Energy Regulation Commission (FERC) describes four characteristics for an RTO to provide economically efficient and reliable services: independence from market participants, appropriate scope of operations and regional configuration, possession of operational authority for all transmission facilities under the RTO’s control, and exclusive authority to maintain short-term reliability. However, efficient operation of RTOs is not guaranteed. Their susceptibility to market manipulation cannot be negated to zero.

It is prudent for EMI to have Market Monitors (MMs) charged with observing and reporting whether market rules and tariffs are achieving customer benefits in a competitive environment. Regardless of the nomenclature and geographical area of application for any of the market management apparatus, this paper underscores three observations on power systems: First, the measure of success for electricity transmission management systems is largely pegged on how incrementally a given system facilitates competitive energy market growth. Second, the system must be constraint solving. The energy needs are dynamic while supply is inelastic. A system is more relevant when it is able to solve existing challenges. Third, the effectiveness of either system lies in its ability to balance the source-end power flows in real time.

3.5.4. Market Regulation

The process of energy market integration requires harmonization of rules for new connections, third-party access to transmission, and distribution systems and retailing. It calls for an independent energy regulator to promote domestic electricity market competition. Pro-competitive structural changes and the quality of sector regulation can be measured at three levels: form, process, and outcome [56].

Table 8. Description of forms of regulation.

Level of Regulation	Descriptive Principle
The Form of Regulation	Measured based on the strength of the regulator in terms of its separation from government and its ability to regulate the market.
The Process of Regulation	Focuses on the degree of transparency exhibited by the regulator, procedural efficiency of regulatory decisions, and the quality of tools and techniques used to conduct the functions.
The Outcome of Regulation	Focuses on comparative results of the regulatory form and process used by the regulator.

Source: Authors’ presentation.

describes these measurable levels.

The key takeaway that this review derives from the literature is that regulatory decisions can best be evaluated ex post facto ([47,56]). Since regulators normally operate under varying rules and objectives, regulating the energy market is susceptible to subjectivity biases. Therefore, regional market governance authorities must strive to control such biases as a cause of regulatory inefficiency.

3.6. Concepts and Practices in Power Pooling

3.6.1. Regional Power Pools

Regional power pooling entails the establishment of a regional infrastructure network and a market to export and import electricity between utilities of respective neighboring countries. The rationale is to create and exploit collective economies of scale in the generation, transmission, and distribution of electric power [12]. Regional integration lowers investment requirements because of economies of scale, reduces costs from lack of investment in peak capacity, improves reliability, and promotes energy security [57]. In Africa, for instance, it is estimated that effective implementation of regional power pools could lower power investment costs by about USD80 billion through 2040 [5]. In Europe, once market coupling is fully implemented, the electricity market is estimated to generate about EUR 2.4 billion to 4 billion per year [11]. As presented in

Table 9. Some of the existing power pools (wholesale).

Global Zone	Power Pool	Economic Bloc	Member States
Africa *	Southern Africa Power Pool (SAPP)	SADC	Botswana, DRC, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Zambia, and Zimbabwe
	Eastern Africa Power Pool (EAPP)	COMESA	Burundi, Djibouti, Democratic Republic of Congo (DRC), Rwanda, Egypt, Ethiopia, Kenya, Sudan, Uganda, and Libya
	West Africa Power Pool (WAPP)	ECOWAS	Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, and Sierra Leone
Asia **	South Asia Region Power Pool (SARPP)	South Asia	Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka
	ASEAN Power Pool	Southeast Asia	Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam
Europe ***	Nord Pool	Northern Europe	Denmark, Estonia, Finland, Latvia, Lithuania, Sweden, and Norway
	CWE Pool	Central–Western Europe	Austria, Belgium, France, Germany, Luxembourg, Netherlands, and Switzerland
	British Isle Pool	UK	Great Britain and Ireland
	AP pool	Apennine Peninsula	Italy and Malta
	IP Pool	Iberian Peninsula	Spain and Portugal
	CEE Pool	Central–Eastern Europe	Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia
	SEE Pool	Southeastern Europe	Bulgaria, Croatia, Greece, and Serbia
USA ****	JPM	Pennsylvania–New Jersey–Maryland	States—Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and District of Colombia
	Northwest Pool	Northwest	Washington, Oregon, Idaho, Wyoming, Montana, Nevada, and Utah, plus a small portion of Northern California and the Canadian provinces of British Columbia and Alberta
	SE Power Pool	Southeast	Florida, Georgia, Alabama, Mississippi, North Carolina, South Carolina, Missouri, and Tennessee
	Southwest (Nuclear Electricity) Pool	Southwest	Arizona, New Mexico, Southern Nevada (AZ/NM/SNV), and the Rocky Mountain Power Area (RMPA) sub-regions of the Western Electric Coordinating Council (WECC)
	Southwest Power Pool (SPP)-Hydro	Southwest	Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas, and Wyoming

Sources: **** [58], *** [59], ** [60], * [12].

, the desire for such integration benefits has triggered the creation of a number of power pools across the globe. Table 9 presents a sample of 150 countries that are already engaged in some form of cross-border electricity power pooling for energy security and trade. The number is projected to increase as the demand for reliable and clean energy increases [4].

3.6.2. Conditions for a Regional Power Pool

A regional power pool implies creation of a regional network and a market to trade and transfer electrical power between utilities and multiple neighboring countries. Some scholars have postulated preconditions for a successful power pool: it must provide an integrated power transmission grid [12]; the market should have the capacity to exploit economies of scale in the power generation [61]; there must be domestic transmission and distribution of electric power; and there must be spillover effects across the different partner states that are greater than those accruable to individual states operating alone. We summarize conditions for regional electricity trading into necessary conditions and sufficient conditions.

Cross-border electricity can take the form of bilateral, trilateral, and even multilateral power pools in the same neighborhood without necessarily being a regional trade bloc. There are four necessary conditions for cross-border electricity trading:

(1)

Regional peak demand must be greater than domestic peak demand so that surplus generation is exported.

$$\underset{t=0}{\overset{t=t_1}{{\displaystyle \int }}}\left\{{\displaystyle \sum }_{allx}\left(H_0+H_1+\dots +H_k\right)-D \right\} dt>{\displaystyle \sum }_{all x}D{D}_i ; \{\begin{array}{c}0<t_1<n\\ i=0,1,2,\dots , k\end{array}$$

(2)

(2)

There must be interconnections of utilities of partner states.

$$i\leftrightarrow j$$

(3)

(3)

Regional market absorption capacity should be greater than or equal to the regional power supply in order to exploit economies of scale.

$$Market absorption rate=\frac{Total power sold}{Total power generated}$$

(4)

$$=\frac{{\sum }_{all x}P{S}_i}{{\int }_{t=0}^{t=t_1}\left\{{\sum }_{allx}\left(H_0+H_1+\dots +H_k\right) \right\} dt}$$

(5)

$$Regional power supply=\underset{t=0}{\overset{t=t_1}{{\displaystyle \int }}}\left\{{\displaystyle \sum }_{allx}\left(H_0+H_1+\dots +H_k\right)-DD \right\} dt$$

(6)

$$\therefore \frac{{\sum }_{all x}P{S}_i}{{\int }_{t=0}^{t=t_1}\left\{{\sum }_{allx}\left(H_0+H_1+\dots +H_k\right) \right\} dt} \ge \underset{t=0}{\overset{t=t_1}{{\displaystyle \int }}}\left\{{\displaystyle \sum }_{allx}\left(H_0+H_1+\dots +H_k\right)-DD \right\} dt$$

(7)

(4)

The maximum power transfer capacity for the regional distribution network should be equal to or greater than the maximum power transfer capacity of the regional transmission line.

$${\displaystyle \sum }_{all T}T{C}_j{}_{max} \ge {\displaystyle \sum }_{all T}PTC{T}_J{}_{max}$$

(8)

The sufficient condition for a regional power pool is that for sustainable bloc trade to occur, the total country benefit of operating in a regional energy market must be greater than its accruable benefit of acting alone. (Sustainable regional electricity trade occurs when the rationale for the power pool is beyond the arrangements of a political regime and beyond the idea to hedge market supply shocks; it is purely premised on marginal cost of a local supply.

$$Benefit of operating={\displaystyle \sum }_{t=0}^{t=t_i}\left[\left(R+XR\right)-\left(C+XC\right)\right]$$

(9)

$$Accruable benefit of acting alone={\displaystyle \sum }_{t=0}^{t=t_i}\left[\left(R\right)-\left(C\right)\right]$$

(10)

$$\therefore {\displaystyle \sum }_{t=0}^{t=t_i}\left[\left(R+XR\right)-\left(C+XC\right)\right] \ge {\displaystyle \sum }_{t=0}^{t=t_i}\left[\left(R\right)-\left(C\right)\right]$$

(11)

The accruable benefits are dependent on the design and operations of the model applied in the region as shown in

Table 10. Some applied electricity pooling models [53].

Model	Sample Market	Key Features	Implication
Gross pooling	England–Wales	The market clearing price is set in advance based on a unit commitment study. Transmission constraints are treated as outside the responsibility of the generator and suppliers. Electricity attracts the same price in the regional market. Both the supply side and distribution side are liberalized (free choice of the supplier).	Whatever is generated is consumed. Free choice of the supplier enhances optimal pricing. Promotes possibility of two-way trading, which hedges against volatility of pool prices.
Net pooling	Nordic countries	Energy is traded between generator and suppliers through bilateral contracts (no transmitter). Trading is for day-ahead contract delivery and future trading for hedging.	It is easier to clear residual energy under bilateral trading in case of predictability inaccuracies. The market is susceptible to suboptimal operations. It may be difficult to realize full competition since bilateral contracts are not open to the public.
Alternative pooling	Italy–France	Several generators. Single buyer acts on behalf of all registered consumers to collate demand predictions.	The buying authority may represent a monopoly. It could facilitate downstream competition. It enables coordination of generation and transmission.
Zonal pools	Scotland–France	The market has different energy zones. Each has its own generation supply system but recognizes spatial differences in the market. Employs different spatial prices in the same market. Transmission costs are admitted in the price formulae.	Encourages inter-zone trading. Provides incentive to reduce transmission constraints.

Author’s presentation.

.

Across the literature, there is hesitancy to universally agree on availability of a perfect pooling model in practice. Preferred arrangements for a given time and market are dependent on the ability of the market governance function to address supply and demand constraints. Developing countries’ pooling is constrained more by generation and transmission infrastructure, while in developed countries it is more to do with sustainable demand given a declining population and reallocation of industries to the developing world.

3.6.3. Cross-Border Infrastructure

Transmission is a critical yet difficult element in EMI. It enables the wholesale market to develop competition and forces the market work better. However, transmission investment is not a problem that markets can solve easily. The challenge has two facets: establishing the infrastructure and managing it efficiently. Infrastructure investment is a complex matter that requires political and strategic decisions of member states. Energy investment has had impact on public debt-burden for developing countries [62]. Efforts to improve energy market governance include public actors conferring authority to private actors (TSOs) to leverage the latter’s expertise and competence in providing a public good, without altering the ownership mandate [63].

To meet the obligation of managing infrastructure, transmission system operators (TSOs) ought to have financial resources to maintain and expand these grids. Smooth functioning of a cross-border energy market is the realistic way of ensuring that the energy sector remains secure, sustainable, efficient, and cost-effective. The role of a TSO comprises two main objectives: facilitating cross-border exchanges for market parties trading on the power exchange and ensuring that increasingly complex energy networks are always safe and reliable. The success of these missions depends on efficiently managing energy flows through cross-border interconnection between national and regional grids to balance supply with demand and avoid congestion. Collaboration between TSOs is therefore important for guaranteeing that power is delivered where it is needed and when it is needed [16].

The unresolved debate on infrastructure is the investment sequence, which is a choice between electricity transmission investment and electricity generation investment. Optimal generation investment requires knowledge of long-term transmission plans, but the generation investment ultimately influences the transmission planning.

As there is no answer to this coordination challenge, we suggest use of the integrated-iterative principle (IIP) of planning to analyze the extent to which generated power is transmitted to power stations and retail distributions with the purpose of increasing regional trading. The IIP approach treats generation and transmission as inter-linked sub-components of a power pool.

One key observation from the literature is the need for clarity on how to approach infrastructure investment. Should integrating countries go bilateral and then later interlink? It does not depend on which of the burdens drives the regional market faster—the surplus burden on the side of the generating country or the shortage burden on the side of consuming country—since the hypothetical spontaneous market equilibrium is realistically remote in the electricity market [64]. The possibility of financing regional infrastructure through pooled resources regardless of the where a partner state lies on the burden continuum is not elucidated in the literature. Therefore, should these contributions be equal or scaled using a given weighted index? Should the scope of TSO be scaled up beyond cross-border exchanges to allow them to invest in infrastructure? Could there be a new model where private companies can be attracted to invest in this infrastructure and then lease out to TSOs?

The distribution energy resource (DER) owners model proposed by [1] seems to work better at a level below TSOs in the vertical electricity distribution chain. Should this cost be reflected in current price such that current consumption subsidizes future consumption? This would imply that the marginal cost pricing principle that drives regional trading would crowd out. The International Energy Agency [4] proposes that regional infrastructure be financed through cost-sharing on a ‘beneficiary pays’ principle, where costs are shared in proportion to each party’s received benefits. This method falls short on quantifying non-monetary costs and benefits. Ref. [9] advocate for a ‘project of common interest’ approach to accelerate integration processes and solve funding constraints, but this still has adaptability challenges because of lack of equal incidence of wants.

How much a country benefits from cross-border infrastructure and ultimately from EMI is largely a function of absorption efficiency and market size. Absorption efficiency is the rate at which demand grows per unit of electricity generated (ss/dd = 1).

3.7. Concepts and Practices in Electricity Pricing in EMI

Where there is trade, there is price. Where there are markets, there is competitive pricing. In the electricity market, regulation seeks to deliver a price that ensures reliable electricity at the lowest cost to consumers. This section presents the dynamics of pricing in an integrated energy market with keen focus on electricity price convergence as a measure of harmonized frameworks among member states.

3.7.1. Forms of Electricity Pricing

Electricity generation is a risky venture. Electricity prices are volatile and hard to predict. In practice, electricity pricing is done using price modeling. One of the commonly applied price models in EMI is EMMA [65]. Two forms of pricing, where are, commonly apply.

Spot pricing: usually charged on delivery periods in contract duration of between one day and one year. Spot markets take two segments: day-ahead auctions where electricity for the next day is traded, and intraday markets where trade takes place until gates close just before delivery (15–60 min).

Future pricing: operates when financial markets reflect the expectations of market actors concerning future market fundamentals [65]. If the EMI is a free market, then spot pricing should reflect the marginal cost of electricity generation and willingness to pay for electricity consumption. Market power abuse is not common with EMI because overcapacity and large interconnection lessens the possibility of concentration among suppliers.

3.7.2. Price Convergence

There are two kinds of convergence [46]: β-convergence and σ-convergence. The β-convergence relates to convergence of cross-sectional dispersion of the series, and there is β-convergence if one series tends to grow faster than others. On the other hand, the σ-convergence happens when a group of series are converging and when dispersion of the series levels decrease over time. In Ref. [66], in their study of electricity price convergence in the European EMI, note that price convergence exists when the price spread between various domestic prices of given countries is minimized through market coupling mechanisms with effective interconnector capacity between member states.

Electricity supply–demand equilibrium prices depend on a range of different supply and demand conditions. On the demand side (load), the main factors are economic activity, geopolitical situations, severe weather conditions, and general efficiency of consumption. On the supply side (generation), fuel prices, construction costs, import diversion, environmental protection costs, and levels of excise and taxation are the main drivers. However, in between the chain [67], several physical factors come into play and significantly affect the actual clearing price of electricity. The midway factors are majorly related to the transmission grid, such as network costs for high voltage lines and substations that ensure safe and reliable transmission of electricity from generation to consumers. The impact of these drivers on price varies depending on the use—household or industry—the commonly used dichotomy in the energy pricing literature ([15], [68], and [69]). Price convergence in an integrating energy market is a process with three stages: domestic price convergence, interconnection price convergence, and regional single price convergence ([16], [70]).

3.7.3. Inter-Domestic Market Price Convergence

Member states operate differing electricity market systems since their fundamental endogenous and external drivers evolve on different spatial and temporal scales. Countries have various market malfunctions, internal structural frictions, external political, and regulatory interventions. Therefore, they have varying abilities to adapt to such externalities. This results in degraded price harmonization. At this stage, price convergence policies aim at smoothing domestic and external factor effects in a similar direction.

3.7.4. Cross-Border Inter-Connection Price Convergence

In a competitive market, prices for electricity should reflect the underlying forces of demand and supply. The law ought to authorize sellers of wholesale electricity to charge market-based rates or cost-based rates [9]. The RTOs will then price wholesale electricity based on the cost of power at various localized points in a system called nodes. The nodes are at a physical connection for a conductor or a group of conductors for two or more electric circuits. The locational marginal price (LMP) is the cost of supplying an incremental load to a particular location.

$$LMP=f \left(cost of energy+congestion cost+transmission cost+ancillary service cost+administrative charge\right).$$

(12)

If there are no transmission constraints, then LMP is expected to be very similar across the EMI.

3.7.5. Regional Single Price Convergence

The studies of price convergence relate to studies of the law of single price and purchasing power parity [42]. The law of single price defines the price for an economic area with different currencies. The price level for country 2 (the foreign one) is expressed in terms of domestic currency where $P_2$ = E$P_1$, where E is the nominal exchange rate. The law of single price establishes that the price of goods should be equal for a given economic area, implying that for a good (g), the ratio of relative prices ($P_{relg})$ is equal to one:

$$P_{relg}=P_1\mathrm{g}/P_2\mathrm{g} =1$$

(13)

where 1 and 2 denote regions. Similarly,

$$\mathrm{PPP}: \ln \left(P_{relg}\right)=\ln P_{2P_{2}g}\mathrm{g}=0$$

(14)

whereas the single price system may be applicable in a monetary union as elaborated by [46], it faces challenges of tariff and exchange rate barriers in trade regimes preceding perfect monetary union stages of economic integration.

$$\frac{\underset{n\to \infty }{\lim \mathrm{E}}{\left(y_{i,t}+k-y_{j,t}+\mathrm{k}\right)}^1}{I_t}=0$$

(15)

where $I_t$represents the information set available at that time. If $\left(y_{i,t}+k-y_{j,t}+\mathrm{k}\right)$ equals 1 in even periods, the observed series will fail to converge, even though the sample mean of differences is equal to zero. Thus, if a de-meanded series of $\left(y_{i,t}+k-y_{j,t}+\mathrm{k}\right)$ contains either a zero mean or follows stochastic patterns, then the convergence between the series will be ignored. Relatedly, Telestar & Yasar (2020) used a conventional augmented Dickey–Fuller technique to conduct a linear unit root test.

$$\mathsf{\Delta }{y}_t=\mathsf{\alpha }{y}_{t-1}+x_t{}^{’}\mathsf{\sigma }{\sum }_{i=1}^p{\beta }_i\mathsf{\Delta }{y}_{t-i}+e_t$$

(16)

where Δ indicates the difference operator; $x_t{}^{’}$ is a vector of optional exogenous repressors, which may consist of a constant or constants and trend; α, β, $y$ are coefficients intended to be estimated; and $e_t$ is assumed the be white noise.

The null hypothesis of the unit root test is (H0; α = 0) against the alternative if stationary processes (H1; α < 0) can be tested by using t-statistics for α as

$$t_{\alpha }=\frac{ά}{s.e.\left(ά\right)}$$

(17)

where $ά$ is the estimation of $ά$ and ($ά$) is the coefficient of standard error.

Bundling the costs of energy together with technical growth costs (such as generation capacity, transmission network, distribution network costs) and policy costs (such as taxes, inflationary costs, exchange rate costs, insurance, environmental costs, and cost subsidies) into a volumetric price will artificially inflate the marginal cost/value of energy. This presents distortionary effects because most technical growth costs and policy costs are residual—they do not change with changes in consumption and production [1]. Such inflated price distortions in the retail market may force customers to bypass grid-based power in part or fall off to other inefficient and non-clean sources of energy. Therefore, for tariffs to encourage efficient coordination among generation companies, network utilities, and distributors, it is essential that regulators design a tariff structure that is as close to the marginal cost as possible.

3.8. Methodological Triangulations Used in EMI Studies

Literature review papers have addressed several aspects of EMI using various methods. Each study proposes a suitable method(s) and adopts a given set of assumptions. The driving interest in this methodological review is the resulting outcome of the respective studies on market governance, power pool, and price convergence.

3.9. Methods Used in Market Governance Studies

A subset of studies on EMI discusses market governance functions with examples from different markets, as indicated in

Table 11. A short review of methods used by studies on market governance.

Topic	Reference	Method Used	Outcome Observations
Decision-making support framework for electricity supply	[71]	Fuzzy Analytical Hierarchical Process	Allows incorporation of fuzzy triangular surveys that can improve the imprecision in judgements made in the electricity sector management.
The implementation of the electricity market design and its effects on driving demand-side flexibility	[72]	Simple Traffic-Light Methodology	Used to measure progress of implementation of electricity regulation and directives set to eliminate existing barriers in the EU energy market.
Perspectives on trade and structural transformation	[73]	Quasi-Experimental Empirical Technique	The review study indicates subjective evidence on the impact of trade on allocation of productive resources and evaluates evidence on the barriers to trade faced by low-income countries.
Electricity tariff in ECOWAS members	[74]	Comparative Analysis and Linear Regression	The method was used to assess the tariff framework, tariff level, and underlying drivers of tariffs across the electricity value chain of the 15 member countries of ECOWAS The findings indicate a significant variation in electricity tariffs across the ECOWAS region, and current electricity trade is at 8.5% of electricity generated in the region.
Coordination in Electricity Distribution Systems	[1]	Enhanced Bulk BA models, Enhanced DSO models	Studied the tradeoffs between distribution and system operation, power coordination, and balancing power supply and demand. The study observes that tariffs are no longer simply a mechanism for cost recovery. Price signals especially at the distribution level must be improved to better reflect the marginal cost of consuming or producing a given service in the distribution network.
Testing the Efficiency of Electricity Markets	[47]	Composite Electricity Market Efficiency Index (Random Walk)	Examines and compares the efficiency of four European electricity markets (NordPool, Italian, Spanish, and Greek) of different microstructures and level of maturity by testing the weak form of the efficient market hypothesis. The finding indicates inefficiencies in all examined markets.
Macroeconomic and Structural Policy Analysis in OECD	[75]	Product Market Regulation (PMR) Questionnaire	Used to obtain information to calculate the 2018 PMR economy wide and sectoral indicators.
Electricity Market: Recent Issues in Market Structure and Energy Trading	[76]	Regulatory Compact	Studied the regulatory function of the electric power industry in the USA. The analysis highlights the historical, current, and future trends, challenges, and opportunities underpinning the competitive electricity markets in the USA.
Market Integration of Local Energy Systems	[77]	Multi-Objective Optimization, Dynamic Pricing, Local Aggregators, Local Integrated Utility, Models	Studied the possibilities for integration of local energy systems into the traditional regulatory context of Europe. The analysis used four flexible management variables (who, what, how, why) and two organizational variables (number of actors involved and nature of transactions). The finding indicates that new approaches brought by integration impose new roles on traditional actors.

Source: Authors’ compilation.

. The key observation from our review of methodologies used by the studies on energy market integration is that market governance is commonly studied using non-numerical approaches (Table 11), like power pooling and price convergence, so the use of quantitative techniques rooted in the positivist research paradigm offers scientific complementarity.

3.10. Methods Used in Power Pool Infrastructure Studies

Power pool studies are majorly focused on two aspects: technical studies focusing on efficiency and reliability of the infrastructure network, and economic studies motivated by the economic implication of those networks.

Table 12. A short review of the methods used in studies on power pool infrastructure.

Topic	Reference	Method(s) Used	Observation Outcomes
Market-based hosting capacity maximization of renewable generation in power grids with energy storage integration	[45]	Bi-Level Optimization Model	Analyzes network ability to integrate larger renewable energy volumes to regional grid.
Public debt – energy Consumption nexus	[62]	Generalized Least Squares and Panel Quantile Regression	Found out that public debt was a favorable influence on proliferation of renewable sources of energy and non-favorable for non-renewables.
Impact of market integration on renewable energy Technology Innovation	[13]	-Full Modified Ordinary Least Squares, -Dynamic Least Squares Method, -Feasible Generalized Least Squares	Established that: (1) market integration has a positive impact on renewable energy technology innovation, (2) the regional impact of market integration on renewable energy technology innovation is heterogeneous in the four provinces of China.
Southwest Power Pool Member Value Statement	[58]	Cost-Benefit Analysis	Analyzed 2020 performance data and found an annual net benefit of more than USD 2.137 billion provided at a benefit–to-cost ratio of 14-to-1. On average, SPP’s members realized savings of 7.39 per 1000 kWh.
Market integration and electricity trade	[9]	Standard Goods Trade Gravity Model	Used energy trade flows between European countries to quantify the effect of the successive EMI enlargement on energy flows. Results indicate that EMI creates electricity trade gains among members and trade diversion for non-members.
Renewable energy access and sustainable development in East Africa	[78]	On SSET, Open-Source Spatial Electrification Modeling	Computes generation cost estimates for EA for the period of 2015–2030. Computes required capacity and investments needed to attain the lowest cost of 100% electrification by 2030 in East Africa.
Conceptual framework for introducing incentive-based demand response program for retail electricity markets	[79]	Documentary Analysis ATLAS.ti Software Snowball SamplingTtechnique	The study brings out major aspects for introducing an incentive-based demand response program (IBDRP) in retail electricity markets. The result offers a three-stage conceptual framework that can be used to develop appropriate IBDRP for retail electricity markets.
Economic development: energy market integration and energy demand implications for East Asia	[38]	General Method of Moment (GMM) Regression Technique	Estimated a cross-country energy demand function with a dataset covering 71 countries over the period of 1965–2010. The estimated results show that rapid economic growth due to industrialization and urbanization tends to increase energy consumption per capita, which in turn may generate a surge in the overall demand for energy.
Power generation and cross-border grid planning for the integrated ASEAN electricity market	[80]	Dynamic Linear Programming Model	Studied the power grid that interconnects ASEAN countries for cross-border power trade to estimate the growing power demand for two decades (2010–2030). Findings show that a more open trade regime encourages development of renewable options that accrue cost savings in the range of 20.9–29%.
Interconnections and market integration in the Irish Single Electricity Market (SEM)	[17]	Time-Varying Econometric Technique based on the Kalman Filter Algorithm	Studied the degree of market integration between Irish SEM and other larger, mature, and interconnected wholesale markets in Europe. The results indicate significant opportunities to improve the market between SEM and other markets via increased interconnection. Again, increased cross-border electricity trade can reduce pressures on the domestic market.

Source: Authors’ compilation.

presents a summary of observed outcomes from the methods employed by these studies.

3.11. Methods Used in Electricity Price Convergence Studies

Price is the ultimate measure of market mechanisms. A market mechanism is the set of rules through which market participants interact and exchange of products occurs. Like ordinary product markets, pricing is at the center of studies on both the supply side and demand side of electricity in electricity markets.

Table 13. A short review of the methods used in studies on electricity prices in EMI.

Topic	Reference	Method/Model Used	Outcome Observations
Market mechanisms for local electricity markets	[81]	Methodological Review	Studied market model choices of Lagrangian methods, game theory methods, heuristic methods, and data-driven methods. The results indicate that Lagrange methods are commonly used for welfare analysis, game theory methods for studies on fairness, while heuristic methods are commonly used on profit maximization studies.
Integration and convergence in European electricity markets	[82]	Vector Error Correction Model	Investigated degree of integration among markets using wholesale electricity prices in Europe. Found out that in the co-integrating equilibrium, all country-specific price dynamics converge toward a steady state, but most exogenous shocks have permanent effects.
Energy market integration in ESEAN: Locational Marginal Pricing (LMP) and welfare implications	[83]	Dynamic Linear Model based on Algebraic Modeling System (GMS)	Analyzed how the LMP of transmission losses influences an optimal energy mix and energy trading in ESEAN. The results suggested that ESEAN member countries would benefit if they enhanced the grid connection to realize the efficiency of the power trading infrastructure.
Estimate of transient and persistent energy efficiency in Africa	[84]	Stochastic fixed effect, True fixed effect, Kumbhakar Heshmati (K-H) models Kumbhakar-Heshmati (K-H) models	Used panel data for 22 countries for the period of 1988–2014 to identify sources and determinants of energy efficiency in Africa. The results indicated that problems of energy efficiency are structural in nature, removing transient inefficiency saves 5.7%, and minimizing persistent inefficiency saves 84% of total consumed energy. Energy efficiency convergence is driven by country-specific factors.
Modeling exact convergence of electricity prices in interconnected markets in Europe	[66]	Latent Univariate, Latent Multivariate, and Maximum Likelihood	Studied joint behavior of day-ahead electricity prices in a two-market setup where market coupling mechanisms are considered in a continuous manner. The finding indicated a strong seasonal behavior in the estimated price convergence spread between forward prices throughout a year.
The impact of electricity prices on economic growth in South Africa	[85]	Autoregressive Distributed Lag (ARDL) bound test	Studying the period of 1985–2014, the findings suggested a long-term relationship between electricity supply, economic growth, electricity prices, trade openness, employment, and capital accumulation. However, only electricity prices have a negative relationship on economic growth.
Integrating thermal and hydro markets: Economic and environmental costs of not harmonizing pricing rules	[86]	Multi-Period “buthtub” Model	Conducted a two-market comparative study (Ontario majorly thermal; and Quebec majorly hydro) to assess how shallow and deep integration impact consumers, producers, and carbon emission levels. One of the markets is competitive (Ontario) and the other follows an average cost pricing regulation (Quebec). Results indicate lower prices (−3.5%) with deep integration of the competitive market; higher prices (+10.8%) and increased transmission capacity (+5.1) with deep integration of the hydro market; and significant increase in the profit to producers under hydro.
Electricity wholesale market prices in Europe; convergence	[64]	Principal Component Analysis (PCA) using Unit root tests (KPSS and ADF)	Measured the process of the European electricity sector in becoming a common market. Results indicate that attempts to develop a single market for electricity were only partially successful. It was only bilateral (weak) convergence that was witnessed.
Price convergence and market integration in Malaysia	[42]	Levin and Lin (LL) panel Unit root test.	Examined price convergence across peninsular Malaysia, Sabah, and Sarawak. Resulting evidence suggested that there is price convergence of price groups in the region.
The convergence of electricity prices in Europe	[86]	β-Convergence and Co- integration	Investigated the degree to which electricity prices in the European Single Market converge using annual price data (1978–2003) for nine European Union member states. The results indicate that convergence did occur for most of the countries in the single market.

Source: Authors’ compilation.

presents some of the methods used by various scholars to study price mechanisms in integrated energy markets.

4. Interpretations and Conclusions

Motivated by the rich literature on the wider context of energy market integration, in this paper we presented a systematic analysis of three variables defining electricity trading in an integrated market: market governance, power pool, and price convergence. This section highlights some of the key takeaways from the review and conclusive remarks on the study objectives that guided this work.

i.

Electricity trading in EMI has a propensity to drive both economic integration and sustainable energy access. Over 150 countries across the globe are already engaged in some form of cross-border electricity pooling for power security and trade. The number is projected to increase as the demand for reliable and clean energy increases. Due to supply inelasticity associated with public good provision, electricity is evolving from being more of a public good to more of a market good as an alternate means to meet the vast elastic demand for electricity in the developing world. Electricity is now coded in the international system of trading and is analyzed by development indices. With the increasing demand for electricity, energy market integration in part offers a practicable solution to energy security shocks. Subsequently, electricity trading is now a critical driver for decision-making in terms of investment financing, infrastructure design, and structuring of trade regimes. We therefore conclude that studies on electricity trading in energy market integration—especially on how to make regional markets effective—is topical and relevant.

ii.

The line between cross-border electricity for energy security and cross-border electricity for trade benefits is blurred in theory, but clear in practice. The theoretical review offers extensive rationale for the integration of electricity markets through economies of scale. The debate on domestic vs. integrated markets has indeed timed out. However, a review of the literature on the evolution of existing EMIs in Europe and the USA, and of implementation processes in upcoming markets in Africa and Asia, indicates that the willingness to sign power pool agreements is not keeping pace with actual fulfillment of the embedded commitments. The practical realities associated with tradeoffs to integrating markets is a key challenge. Much as energy security objectives and energy trade objectives re-enforce each other, they may not necessarily constitute a ‘twin’ goal to most countries in terms of time and burden. There are more bilateral and multilateral than unified cross-border arrangements. Energy security seems to be more practically adoptable than economic needs. The illusion that bilateral interconnections and multilateral arrangements are prerequisite steps for market integration could not be substantiated in the reviewed literature. We suggest that crafting ways and means for how to integrate cross-border systems without sacrificing the local economy, could make the idea of EMI more palatable to partner countries and therein reignite their commitments.

iii.

Competitive market design promotes effective market governance and price mechanisms but seems to be inadequate for appropriating large infrastructure investments for EMI. To leverage the developmental value of integrating electricity markets, electricity reforms that would size up sub-regional cooperation and electricity exchange alone are not enough. Changes in wider institutional arrangements that would enhance a resilient, competitive private sector are important for sustained trade. The integrated market design incentivizes competition for marginal cost pricing, which allocates regional resources efficiently. Each of the federating partners has to undertake policy, institutional, and regulatory metamorphosis to allow effective adoption of regional systems that will run the trade transactions. The measure of success for these systems is based on how incrementally they facilitate competitive energy market growth and solve constraints. The effectiveness of the EMI market management system lies in its ability to balance the source–end power flows in real time. However, the question about the best investment model for financing regional power pool infrastructure for generation, cross-border transmission, and intra-partner distribution network is still unanswered. The three models suggested in the literature to supplement a market approach—public- private partnerships; ‘beneficiary pays’ principle; and ‘project of common interest’—still have adaptation and implementation constraints.

iv.

Ex ante studies could improve the design of upcoming regional markets. Most studies on EMI, because they are data oriented, are ex post facto in nature. Ex ante and early process studies based on other methods such as game theory, predictive heuristics, and a Lagrangian approach may offer contextual descriptions of the integrating market in lieu of design decisions.

Since the scope of this study was the global energy market in which market integration has been adopted, the study faced biased selectivity challenges. The need to capture both the historical and current facts about the frequently changing global energy market rendered the review rather more complex than expected. Overall, the synthesis provides a foundation for our subsequent papers on the effect of governance on market efficiency, harmonization of tariff recourse policies, and electricity price convergence in East Africa.