energies
Review
Electricity Trading in Energy Market Integration: A
Theoretical Review
Muhumuza Ezra Rubanda 1 , Livingstone Senyonga 1 , Mohammed Ngoma 2 and Muyiwa S. Adaramola 2, *
Citation: Rubanda, M.E.; Senyonga,
L.; Ngoma, M.; Adaramola, M.S.
Electricity Trading in Energy Market
Integration: A Theoretical Review.
Energies 2023, 16, 103. https://
doi.org/10.3390/en16010103
Academic Editor:
Dimitrios Katsaprakakis
Received: 21 October 2022
Revised: 24 November 2022
Accepted: 24 November 2022
Published: 22 December 2022
Copyright: © 2022 by the authors.
Licensee MDPI, Basel, Switzerland.
This article is an open access article
distributed under the terms and
conditions of the Creative Commons
Attribution (CC BY) license (https://
creativecommons.org/licenses/by/
4.0/).
Energies 2023, 16, 103. https://doi.org/10.3390/en16010103
1 Faculty of Economics, Energy and Management Science, Makerere University Business School (MUBS),
Plot 21A Portbell Road, Nakawa, Kampala P.O. Box 1337, Uganda
2 Faculty of Environmental Sciences and Natural Resource Management, Norwegian University of Life
Sciences (NMBU), Høgskoleveien 12, 1433 Ås, Norway
* Correspondence: muyiwa.adaramola@nmbu.no; Tel.: +47-9769-0282
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.
Keywords: energy market integration (EMI); price convergence (PC); energy trade gaming
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 pri-
vately 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, in-
creasing 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 produc-
tive 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
https://www.mdpi.com/journal/energies
Energies 2023, 16, 103 2 of 31

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 inte-
grated 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 frame-
work 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.
Energies 2022, 15, x FOR PEER REVIEW 3 of 29
Energies 2023, 16, 103 3 of 31

2.3. Data Sources

2.3. Data Sources
A search for relevant material was carried out using websites of various academic
A search for relevant material was carried out using websites of various academic
and development agencies, internet search engines, and databases of journal publishers.
and development agencies, internet search engines, and databases of journal publishers.
Published scientific papers were searched through websites of e-journals. The main key-
Published scientific papers were searched through websites of e-journals. The main key-
words and phrases searched include (i) energy market integration, (ii) electricity market
words and phrases searched include (i) energy market integration, (ii) electricity market
governance, (iii) regional power pool, and (iv) electricity pricing in integrated markets.
governance, (iii) regional power pool, and (iv) electricity pricing in integrated markets.
2.4. Search
2.4. Search Strategy
Strategy
The search
The search strategy
strategy waswas based
based onon the
the key
key variables
variables in
in each
each research
research question.
question. The
The
systematic selection tree method used in Figures 1–4 depicts how literature was
systematic selection tree method used in Figures 1–4 depicts how literature was navigated navigated
to identify
to identify the
thevariables
variablesofofconcern
concernininthe
the respective
respective research
research question
question raised
raised in Section
in Section 2.1
2.1 above. The number in brackets indicates the number of publications
above. The number in brackets indicates the number of publications reviewed for reviewed for that
that
specific category
specific category of
of literature.
literature.

Figure 1.
Figure 1. Review
Review strategy
strategy on
on debates
debates and
and paradigms.
paradigms.

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 screen-
ing 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 doc-
uments 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.
Energies 2022,16,
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2022, 15, 103
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of 29
31

Figure 2.
2. Review strategy
strategy on
on theories
theories relating
relating to
to electricity
electricity trading in
in EMI.
Figure Review electricity trading
trading in EMI.
EMI.

Figure 3. Review strategy on concepts and practices used in integrated electricity markets.
Figure 3. Review strategy on concepts and practices used in integrated electricity
electricity markets.
markets.
Energies 2022, 16,
Energies 2023, 15, 103
x FOR PEER REVIEW 55of
of 29
31

Scientific methodologies on
electricity trading in

Market Power Pool Price

governance study Infrastructure Convergence
methods study methods study methods

Qualitative methods Quantitative methods

(29) (29)

Figure 4. Review strategy of the various methods used in electricity trade in integrated market stud-
Figure 4. Review strategy of the various methods used in electricity trade in integrated market studies.
ies.
2.6. Quality Assessment and Data Extraction
2.5. Identification and Selection of Review Studies
Objective and subjective evaluation criteria were applied to assess and determine the
A comprehensive
quality of the studies and literature
reports.search was done
The quality using
criteria a general–specific
included synthesis.
the theoretical We
basis and
started with identification of 213 potential records that were subjected to first
relevance of the research, research methodology and design, reliability of data sources, stage screen-
ing for
and duplication
quality and title Both
of the analysis. relatedness. At this
qualitative andlevel, 109 records
quantitative datawere eliminated.
related In the
to the research
second stage,
questions abstracts,
of this review executive summaries,
were systematically and conclusions of the remaining 104 doc-
analyzed.
uments were perused and assessed for the inclusion and exclusion criteria presented in
3. Results
Section 2.2and Discussion
using the strategy demonstrated in Section 2.4. Subsequently, full-text evalua-
tion was
The conducted
key findings onfrom
66 records that informed
our review this systematic
of the literature review.
are presented under four themes:
debates and perspectives, theories and paradigms, concepts and practices, and method-
2.6. Quality
ological Assessment and Data Extraction
triangulation.
Objective and subjective evaluation criteria were applied to assess and determine the
3.1. Debates and Perspectives
quality of the studies and reports. The quality criteria included the theoretical basis and
Debates
relevance about
of the electricity
research, as a utility
research come from
methodology perspectives
and on whether
design, reliability it is sources,
of data a public
good or a market good. The ‘public good’ view holds that electricity is a basic
and quality of the analysis. Both qualitative and quantitative data related to the research requirement
for any community,
questions as itwere
of this review can improve living analyzed.
systematically standards via provision of health education
and mobility services [2]. According to [8,9], electricity is evolving from being more of a
public good
3. Results to Discussion
and 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
The key findings from our review of the literature are presented under four themes:
in the developing world. Electricity is now coded in the international system of trading
debates and perspectives, theories and paradigms, concepts and practices, and methodo-
and is analyzed by development indices. However, the electricity market is complicated. It
logical triangulation.
includes lengthy debates about market regulation versus deregulation, monopolies versus
competition, and who should be responsible for generation, transmission, and distribution
3.1. Debates and Perspectives
of power.
Debates
In about electricity
this section, we explore as athe
utility comeabout
debates from the
perspectives on whethertrading
topic of electricity it is a public
in an
good or a market good. The ‘public good’ view holds that electricity
integrated energy market. The debate about whether economic rationale lies with theis a basic requirement
for any community,
domestic market or theas it can improve
regional marketliving standardsenergy
for sustainable via provision
supply of health
seems education
to have been
and mobility
settled by strongservices [2]. According
affirmation to [8–9],
for a wider electricity
regional market. is Table
evolving from being
1 presents more ofofa
a summary
publicon
views good to more
possible of aand
costs market good.
benefits This is because
of energy supply inelasticity associated with
market integration.
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 ver-
sus competition, and who should be responsible for generation, transmission, and distri-
bution of power.
Energies 2023, 16, 103 6 of 31

Table 1. A summary of costs and benefits of integrating energy markets [10–18].

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.

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, en-
ergy 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
Energies 2023, 16, 103 7 of 31

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 trad-
ing 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 associ-
ated 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.
Energies 2023, 16, 103 8 of 31

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 recog-
nize 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 [27–29], 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 [30–32], 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
Energies 2023, 16, 103 9 of 31

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 reduc-
ing 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 engi-
neering, 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.
Energies 2023, 16, 103 10 of 31

The electricity price theory advanced by [40] provides the basis for spot electricity pric-
ing 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:

δ
βk ( t ) βk ( t ) = [θ] (1)
δkt

where βk(t) is hourly spot price for kth customer at time t (USD/kWh); δkt 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  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.

Table 2. Components of energy market integration.

Component
Technical Integration
Technological Integration
Functional Integration
Organizational Integration
Information Integration
Description
Integration of technical facilities for various partner states (zones) into a single complex for
generation, transmission, and distribution of energy.
Combination of individual technological systems into a single technological chain.
Working towards a unified set of goals, criteria, and procedure harmonization.
Interaction of various participants and their concerted actions towards their goal achievement.
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
Energies 2023, 16, 103 11 of 31

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 har-
monization 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 infor-
mation [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 infor-
mation 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 electri-
fication 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 elec-
tricity [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 de-
velopment 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 describes the unique features
of electricity as a tradable good.
Energies 2023, 16, 103 12 of 31

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.
Demand side
Technology is majorly concentrated at
Technology
production level.
Products are usually tangible with no
Indirect cost
supplementary costs of handling.
Source: Authors’ presentation.
Cannot be efficiently stored.
Real time product.
High level of externalities in transmission.
Low elasticity of demand because of technical rigidities.
Huge fluctuation in demand.
Multi-level technological concentration; generation,
transmission, distribution, and use.
Non-tangibility attracts supplementary costs for transmission
and use.

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, 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 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.
Energies 2023, 16, 103 13 of 31

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

Variable EMI Net Exporter EMI Net Importer

• Revenue • Energy access

Key benefits • Job creation • Energy security

• Regional influence • Economic stability

• Disposal of surplus power • Circumvent heavy investment in
Preferential interests • Benefits from economies of scale energy cost and time
• Regional competitive advantage • Reverse trade for other products

• Heavy investment in installed capacity, evacuation

lines, and power exchange stations
• Domestic environmental degradation • Erosion of domestic incentive to
Opportunity cost • Peak demand shocks to domestic consumers generate own power
• Higher domestic prices in initial stages of integration
(sales constraint).

Risk • Overdependence on foreign market because of • Power sovereignty

inelasticity to change power lines
Source: Authors’ illustration.

Table 5. Description of management function in EMI.

Market Management Function Description of the Function

Setting market clearance prices
Securing generation availability
Managing transmission constraints
Enabling demand-side participation
Capturing data for settlements
Calculating payment
Source: Authors’ compilation.
Authorities design frameworks for all possible pricing systems, ex ante pricing,
ex post pricing, and bid pricing.
Put in place the necessary incentives for sufficient generation capacity that can
meet the electricity demand of the region.
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.
A full set of bids from a large base of consumers/agents helps to balance
generation.
Data support retrospective settlement, accuracy, and auditability because of the
large sums of money involved in electricity trading.
The intersection of sales and purchase curves depicts point of confirmed trading.

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.

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.
Energies 2023, 16, 103 14 of 31

In the integration process, the market management function is charged with facilitat-
ing fundamental policy reform, preconditioning the establishment a of regional energy
market [54]. The shift from domestic load factor constraints to regional power pool con-
straints 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 coor-
dination 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, different institutional frameworks apply in different geographical areas.

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

Common
Power Operator Case Study Principal Function
Abbreviation

• An independent non-profit entity under control of a

board representing all stakeholders overseen by the
NGC of UK, CAISO regulator.
Independent System Spain, Scandinavia, • Operates a centralized spot market.
ISO
Operator New York, PJM1 , New • Manages non-price effects as a non-discriminating
England monopoly.
• Facilitates private markets in allocating transmission
rights and counter flows (Burger et al.; 2019).

Regional • Facilitates supply-demand processes. Independent

USA from market participants. Appropriate scope of
Transmission RTO
(FERC) operations and regional configuration (Congress
Organizations
Reserve Service, 2017).

• The system operators are separate from the

Argentina ownership of the transmission.
Systems Operator SO
Australia • The transmission function remains with the old
utilities (Malik, 2010).

• Facilitating cross-border exchange for parties trading

Transmission System Central–Western on the power exchange.
TSO
Operator Europe • Ensuring that networks always operate safely and
reliably (European commission, 2014).
Energies 2023, 16, 103 15 of 31

Table 7. Cont.

Common
Power Operator Case Study Principal Function
Abbreviation

• Performs regulatory oversight over DSO and DER

markets.
• Balances power at the transmission level. Ensures
Bulk System feasibility of power flow scheduled by generators,
BA US, EU storage providers, aggregators, and retailers in the
Balancing Authority
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 • Distribution level power balancing through

DSO US, EU aggregation of all demand with injection bids from
Operators
DER and aggregators.

• Provides electricity services to end users.

Distribution Energy • Helps improve outreach of price signals at the
DER Domestic markets distribution level.
Resource
• 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.

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 facil-
ities 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 con-
nections, 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 describes these measurable levels.
Energies 2023, 16, 103 16 of 31

Table 8. Description of forms of regulation.

Level of Regulation Descriptive Principle

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

The key takeaway that this review derives from the literature is that regulatory deci-
sions 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 neighbor-
ing 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, 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].

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

Global Zone Power Pool Economic Bloc Member States

Southern Africa Power Botswana, DRC, Lesotho, Mozambique, Namibia, South Africa,
SADC
Pool (SAPP) Swaziland, Zambia, and Zimbabwe
Eastern Africa Power Burundi, Djibouti, Democratic Republic of Congo (DRC),
Africa * COMESA
Pool (EAPP) Rwanda, Egypt, Ethiopia, Kenya, Sudan, Uganda, and Libya
Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, Gambia,
West Africa Power
ECOWAS Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal,
Pool (WAPP)
and Sierra Leone
South Asia Region Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
South Asia
Power Pool (SARPP) Pakistan, and Sri Lanka
Asia **
ASEAN Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia,
Southeast Asia
Power Pool Myanmar, Philippines, Singapore, Thailand, and Vietnam
Denmark, Estonia, Finland, Latvia, Lithuania, Sweden, and
Nord Pool Northern Europe
Norway
Europe *** Central–Western Austria, Belgium, France, Germany, Luxembourg, Netherlands,
CWE Pool
Europe and Switzerland
British Isle Pool UK Great Britain and Ireland
Energies 2023, 16, 103 17 of 31

Table 9. Cont.

Global Zone Power Pool Economic Bloc Member States

AP pool Apennine Peninsula Italy and Malta
IP Pool Iberian Peninsula Spain and Portugal
Central–Eastern Czech Republic, Hungary, Poland, Romania, Slovakia, and
CEE Pool
Europe Slovenia
SEE Pool Southeastern Europe Bulgaria, Croatia, Greece, and Serbia
States—Delaware, Illinois, Indiana, Kentucky, Maryland,
Pennsylvania–New
JPM Michigan, New Jersey, North Carolina, Ohio, Pennsylvania,
Jersey–Maryland
Tennessee, Virginia, West Virginia, and District of Colombia
Washington, Oregon, Idaho, Wyoming, Montana, Nevada, and
Northwest Pool Northwest Utah, plus a small portion of Northern California and the
Canadian provinces of British Columbia and Alberta
USA **** Florida, Georgia, Alabama, Mississippi, North Carolina, South
SE Power Pool Southeast
Carolina, Missouri, and Tennessee
Southwest Arizona, New Mexico, Southern Nevada (AZ/NM/SNV), and
(Nuclear Electricity) Southwest the Rocky Mountain Power Area (RMPA) sub-regions of the
Pool Western Electric Coordinating Council (WECC)
Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri,
Southwest Power Pool
Southwest Montana, Nebraska, New Mexico, North Dakota, Oklahoma,
(SPP)-Hydro
South Dakota, Texas, and Wyoming
Sources: **** [58], *** [59], ** [60], * [12].

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.

tZ=t1( ) 
0 < t1 < n
∑ ( H0 + H1 + . . . + Hk ) − D dt > ∑ DDi ;
i = 0, 1, 2, . . . , k
(2)
t =0 allx all x

(2) There must be interconnections of utilities of partner states.

i↔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.

Total power sold

Market absorption rate = (4)
Total power generated

∑ all x PSi
= R t=t (5)
1
t =0 {∑ allx ( H0 + H1 + . . . + Hk ) } dt
Energies 2023, 16, 103 18 of 31

tZ=t1( )
Regional power supply = ∑ ( H0 + H1 + . . . + Hk ) − DD dt (6)
t =0 allx

tZ=t1( )
∑ all x PSi
∴ R t=t ≥ ∑ ( H0 + H1 + . . . + Hk ) − DD dt (7)
t =0
1
{∑ allx ( H0 + H1 + . . . + Hk ) } dt t =0 allx

(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.

∑ TCjmax ≥ ∑ PTCTJ max (8)

all T all T

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.
t = ti
Bene f it o f operating = ∑ [( R + XR) − (C + XC)] (9)
t =0
t = ti
Accruable bene f it o f acting alone = ∑ [( R) − (C)] (10)
t =0
t = ti t = ti
∴ ∑ [( R + XR) − (C + XC)] ≥ ∑ [( R) − (C)] (11)
t =0 t =0

The accruable benefits are dependent on the design and operations of the model
applied in the region as shown in Table 10.

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

Model Sample Market Key Features Implication

The market clearing price is set in advance
based on a unit commitment study.
Whatever is generated is consumed.
Transmission constraints are treated as outside
Free choice of the supplier enhances
the responsibility of the generator and
Gross optimal pricing.
England–Wales suppliers.
pooling Promotes possibility of two-way trading,
Electricity attracts the same price in the
which hedges against volatility of pool
regional market.
prices.
Both the supply side and distribution side are
liberalized (free choice of the supplier).
It is easier to clear residual energy under
bilateral trading in case of predictability
Energy is traded between generator and
inaccuracies.
suppliers through bilateral contracts (no
The market is susceptible to suboptimal
Net pooling Nordic countries transmitter).
operations.
Trading is for day-ahead contract delivery and
It may be difficult to realize full
future trading for hedging.
competition since bilateral contracts are not
open to the public.
Energies 2023, 16, 103 19 of 31

Table 10. Cont.

Model Sample Market Key Features Implication

The buying authority may represent a
Several generators. monopoly.
Alternative
Italy–France Single buyer acts on behalf of all registered It could facilitate downstream competition.
pooling
consumers to collate demand predictions. It enables coordination of generation and
transmission.
The market has different energy zones.
Each has its own generation supply system but
recognizes spatial differences in the market. Encourages inter-zone trading.
Zonal pools Scotland–France Employs different spatial prices in the same Provides incentive to reduce transmission
market. constraints.
Transmission costs are admitted in the price
formulae.
Author’s presentation.

Across the literature, there is hesitancy to universally agree on availability of a per-

fect 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 transmis-
sion 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. Opti-
mal 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 inter-
link? It does not depend on which of the burdens drives the regional market faster—the
Energies 2023, 16, 103 20 of 31

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 con-
tinuum 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 com-
monly 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 overcapac-
ity 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.
Energies 2023, 16, 103 21 of 31

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, environ-
mental 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 trans-
mission 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 regu-
latory 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 (cost o f energy + congestion cost + transmission cost + ancillary service cost + administrative charge). (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 P2 = EP1 , 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 (Prelg ) is equal to one:

Prelg = P1 g/P2 g = 1 (13)

where 1 and 2 denote regions. Similarly,

 
PPP : ln Prelg = ln P2P2 g g = 0 (14)
Energies 2023, 16, 103 22 of 31

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.

1
limE yi,t + k − y j,t + k
n→∞
=0 (15)
It


where It represents the information set available at that time. If yi,t + k − y j,t + k 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 yi,t + k − y j,t + k 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.
0 p
∆yt =αyt−1 + xt σ ∑i=1 βi ∆yt−i +et (16)
0
where ∆ indicates the difference operator; xt 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 et 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

ά
tα = (17)
s.e.(ά)

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. 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.
Energies 2023, 16, 103 23 of 31

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

Topic Reference Method Used Outcome Observations

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

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
Energies 2023, 16, 103 24 of 31

by the economic implication of those networks. Table 12 presents a summary of observed

outcomes from the methods employed by these studies.

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
Public debt –
energy
Consumption nexus
Impact of market
integration on renewable
energy
Technology
Innovation
Southwest Power Pool
Member Value Statement
Market integration and
electricity trade
Renewable energy access and
sustainable development in
East Africa
Conceptual framework for
introducing incentive-based
demand response program for
retail electricity markets
Economic development:
energy market integration and
energy demand implications
for East Asia
[45] Bi-Level Optimization Model
Generalized Least Squares
[62] and Panel Quantile
Regression
-Full Modified
Ordinary Least Squares,
-Dynamic Least Squares
[13]
Method,
-Feasible Generalized Least
Squares
[58] Cost-Benefit Analysis
Standard Goods Trade Gravity
[9]
Model
On SSET, Open-Source Spatial
[78]
Electrification Modeling
Documentary Analysis
ATLAS.ti Software
[79]
Snowball
SamplingTtechnique
General Method of Moment
[38]
(GMM) Regression Technique
Analyzes network ability to integrate larger
renewable energy volumes to regional grid.
Found out that public debt was a favorable
influence on proliferation of renewable
sources of energy and non-favorable for
non-renewables.
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.
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.
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.
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.
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.
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.
Energies 2023, 16, 103 25 of 31

Table 12. Cont.

Topic Reference Method(s) Used Observation Outcomes

Power generation and
cross-border grid planning for
the integrated ASEAN
electricity market
Interconnections and market
integration in the Irish Single
Electricity Market (SEM)
Source: Authors’ compilation.
Dynamic Linear
[80]
Programming Model
Time-Varying Econometric
[17] Technique based on the
Kalman Filter Algorithm
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%.
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.

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 presents some of the methods
used by various scholars to study price mechanisms in integrated energy 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
Integration and convergence
in European electricity
markets
Energy market integration in
ESEAN: Locational Marginal
Pricing (LMP) and welfare
implications
Studied market model choices of Lagrangian
methods, game theory methods, heuristic
methods, and data-driven methods.
Methodological The results indicate that Lagrange methods are
[81]
Review commonly used for welfare analysis, game
theory methods for studies on fairness, while
heuristic methods are commonly used on profit
maximization studies.
Investigated degree of integration among
markets using wholesale electricity prices in
Europe.
Vector Error Correction
[82] Found out that in the co-integrating equilibrium,
Model
all country-specific price dynamics converge
toward a steady state, but most exogenous
shocks have permanent effects.
Analyzed how the LMP of transmission losses
influences an optimal energy mix and energy
Dynamic Linear Model trading in ESEAN.
[83] based on Algebraic The results suggested that ESEAN member
Modeling System (GMS) countries would benefit if they enhanced the
grid connection to realize the efficiency of the
power trading infrastructure.
Energies 2023, 16, 103
Table 13. Cont.
Topic
Estimate of transient and
persistent energy efficiency in
Africa
Modeling exact convergence
of electricity prices in
interconnected markets in
Europe
The impact of electricity
prices on economic growth in
South Africa
Integrating thermal and hydro
markets: Economic and
environmental costs of not
harmonizing pricing rules
Electricity wholesale market
prices in Europe; convergence
Price convergence and market
integration in Malaysia
The convergence of electricity
prices in Europe
Source: Authors’ compilation.
4. Interpretations and Conclusions
this paper we presented a systematic analysis of three variables defining electricity trading
26 of 31
Reference Method/Model Used Outcome Observations
Used panel data for 22 countries for the period of
1988–2014 to identify sources and determinants
Stochastic fixed effect,
of energy efficiency in Africa.
True fixed effect,
The results indicated that problems of energy
Kumbhakar Heshmati
[84] efficiency are structural in nature, removing
(K-H) models
transient inefficiency saves 5.7%, and minimizing
Kumbhakar-Heshmati
persistent inefficiency saves 84% of total
(K-H) models
consumed energy. Energy efficiency convergence
is driven by country-specific factors.
Studied joint behavior of day-ahead electricity
prices in a two-market setup where market
Latent Univariate, coupling mechanisms are considered in a
[66] Latent Multivariate, continuous manner.
and Maximum Likelihood The finding indicated a strong seasonal behavior
in the estimated price convergence spread
between forward prices throughout a year.
Studying the period of 1985–2014, the findings
suggested a long-term relationship between
Autoregressive electricity supply, economic growth, electricity
[85] Distributed Lag (ARDL) prices, trade openness, employment, and capital
bound test accumulation.
However, only electricity prices have a negative
relationship on economic growth.
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
Multi-Period “buthtub” the other follows an average cost pricing
[86]
Model 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.
Measured the process of the European electricity
sector in becoming a common market.
Principal Component
Results indicate that attempts to develop a single
[64] Analysis (PCA) using Unit
market for electricity were only partially
root tests (KPSS and ADF)
successful. It was only bilateral (weak)
convergence that was witnessed.
Examined price convergence across peninsular
Levin and Lin (LL) panel Malaysia, Sabah, and Sarawak.
[42]
Unit root test. Resulting evidence suggested that there is price
convergence of price groups in the region.
Investigated the degree to which electricity
prices in the European Single Market converge
β-Convergence and using annual price data (1978–2003) for nine
[86]
Co- integration European Union member states.
The results indicate that convergence did occur
for most of the countries in the single market.
Motivated by the rich literature on the wider context of energy market integration, in
Energies 2023, 16, 103 27 of 31

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 elec-
tricity 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 mecha-
nisms but seems to be inadequate for appropriating large infrastructure investments
for EMI. To leverage the developmental value of integrating electricity markets, elec-
tricity reforms that would size up sub-regional cooperation and electricity exchange
alone are not enough. Changes in wider institutional arrangements that would en-
hance 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 under-
take 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 sys-
tem 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 infrastruc-
ture 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.
Energies 2023, 16, 103 28 of 31

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.

Author Contributions: Conceptualization, M.E.R. and L.S.; methodology, M.E.R.; formal analysis,
M.E.R.; investigation, M.E.R.; resources, M.E.R.; L.S.; M.N. and M.S.A.; data curation, M.E.R.; writing—
original draft preparation, M.E.R.; writing—review and editing, L.S.; M.N. and M.S.A.; supervision,
L.S.; M.N. and M.S.A. All authors have read and agreed to the published version of the manuscript.
Funding: This research received no external funding.
Conflicts of Interest: The authors declare no conflict of interest.

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