This paper describes development and experiences from the Nordic region and the current status and trend toward an integrated and open electricity market comprising most of Europe. The paper describes practical experiences as well as theoretical investigations and modeling studies. We focus on the following subjects: Congestion management: There are a variety of arrangements for transfer across national borders and for congestion management in Europe. A common future system based on an improved version of the Nordic market splitting system can be a good alternative. Management of ancillary services: We see certain trends concerning ancillary services in the Nordic market: 1) more focus on cost effectiveness and a move toward market arrangements including cross border trade in ancillary services; 2) increased use of the demand side in the provision of ancillary services; and 3) increased flexibility in defining the demand for ancillary services. Investment incentives: Experience as well theoretical investigations indicate that investment in generating capacity is a problem in an open electricity market, where investors are exposed to high risk and uncertainty. One important conclusion from our studies is that end user response (elasticity) to electricity prices is important in an open market. We also discuss how additional incentive mechanisms can be used as a measure to achieve capacity adequacy, when the market fails to provide sufficient signals for new investments.

Three very different methods of accomplishing the same task-managing the operation of the transmission system in the deregulated power system operating environment-have been implemented as deregulated market structures have been created around the world. They are first, the optimal power flow (OPF) model found in various implementations in the United Kingdom, parts of the United States, and in Australia and New Zealand. Second, the point tariff, price area congestion control model used in the Nordpool market area in Norway and Sweden. Third, the US transaction-based model. All are pragmatic solutions implemented in advance of complete theoretical understanding. Each has strengths and flaws, and there are some surprising inter-relationships. Each maintains power system security but differs in its impact on the economics of the energy market. No clearly superior method has so far emerged. In the future, methods of combining decentralized market solutions with operational use of optimal power flow may provide better solutions to existing and emerging problems.