EU Internal Energy Market: Liberalisation, Market Coupling, and Regulation

Introduction

The EU internal energy market — comprising the Third Energy Package (2009), the Clean Energy for All Europeans Package (2019), and the Fit for 55 revisions — establishes a harmonised legal framework for electricity and gas trading across Member States. The market’s foundational principles are liberalisation, unbundling, third-party access, consumer protection, and regulatory independence. The internal market is both an instrument of economic integration — enabling cross-border trade in energy on competitive terms — and an enabler of decarbonisation, facilitating the integration of variable renewable energy sources through market coupling, balancing markets, and flexible system operation.

The Third Energy Package and the 2009 Framework

Directive 2009/72/EC (Electricity Directive) and Directive 2009/73/EC (Gas Directive), together with Regulations (EC) 713/2009, 714/2009, and 715/2009, introduced the core structural reforms: (a) unbundling — separation of generation/supply from transmission network operation, through ownership unbundling, independent system operator (ISO), or independent transmission operator (ITO) models; (b) regulated third-party access (TPA) — transparent, non-discriminatory access to transmission and distribution networks; (c) independent national regulatory authorities (NRAs) — with powers to set or approve tariffs, enforce unbundling, and monitor competition; and (d) the Agency for the Cooperation of Energy Regulators (ACER) — coordinating NRAs on cross-border issues.

The Clean Energy Package (2019)

Directive (EU) 2019/944 (recast Electricity Directive) and Regulation (EU) 2019/943 (Electricity Regulation) updated the market design for the decarbonisation era. Key innovations include: (a) consumer empowerment — dynamic pricing contracts, smart metering, switching within 24 hours, and consumer-led energy communities; (b) renewable integration — priority dispatch removed for new renewable capacity (transitioning to market-based dispatch), balancing responsibility for all generators, and advanced cross-border trading; (c) capacity mechanisms — market-wide mechanisms subject to strict Commission scrutiny for compatibility with the Energy Union; (d) regional operational centres (ROCs) — replacing transmission system operator (TSO) bilateral coordination with mandatory regional governance.

Market Coupling and Cross-Border Trading

The Single Day-Ahead Coupling (SDAC) — implemented through the EUPHEMIA algorithm — integrates day-ahead electricity markets across 27 Member States, enabling electricity to flow from low-price to high-price zones automatically, maximising social welfare and enabling efficient dispatch of generation. The Single Intraday Coupling (SIDC) provides continuous cross-border intraday trading, improving the integration of variable renewables by enabling near-real-time balancing. The Forward Capacity Allocation (FCA) Regulation (Regulation 2016/1719) governs long-term cross-border transmission rights, enabling hedging by generators and suppliers.

Market coupling assigns cross-border transmission capacity implicitly in the price-coupling algorithm, replacing explicit capacity auctions and eliminating inefficient capacity-hoarding. The Flow-Based Market Coupling (FBMC) methodology, implemented in Central Western Europe, calculates available capacity based on physical network constraints rather than fixed net transfer capacities, increasing available trading capacity by 20–30%.

ACER — The Agency for the Cooperation of Energy Regulators

Regulation (EU) 2019/942 (the ACER recast Regulation) strengthens the Agency’s role as the independent EU-level regulatory authority. ACER: (a) adopts and amends the Network Codes and Guidelines that harmonise cross-border electricity and gas trading (capacity allocation, balancing, congestion management, interoperability); (b) monitors the Integrated Wholesale Electricity Market and the Internal Gas Market, publishing annual market monitoring reports; (c) decides on cross-border infrastructure exemptions and regulatory disputes between NRAs; (d) supervises the European Federation of Energy Traders (EFET) and the European Network of Transmission System Operators (ENTSO-E, ENTSOG) , including approval of the Ten-Year Network Development Plan (TYNDP); and (e) appoints and oversees the Energy Regulators Section (ERS) of the Electricity and Gas Regulatory Fora.

Wholesale Market Integrity and Transparency — REMIT

Regulation (EU) No 1227/2011 (REMIT, revised in 2024) prohibits insider trading and market manipulation in wholesale energy markets, ensuring market integrity and transparency. REMIT applies to wholesale energy products (electricity and gas supply, derivatives, transportation contracts) traded in the EU. Inside information (Article 2 REMIT) must be publicly disclosed in a timely, effective, and complete manner (Article 4). ACER collects and analyses transaction data through the REMIT Information System (ARIS) and coordinates investigations with NRAs.

The 2024 REMIT revision extends the scope to cover algorithmic trading, benchmarks, and new trading platforms; introduces a Union-wide position limits regime for gas derivatives; and enhances ACER’s investigation powers (on-site inspections, requests for information, cooperation with ESMA).

Capacity Mechanisms

Capacity mechanisms — payments to generators for maintaining available capacity, distinct from energy payments — are permitted subject to strict compatibility conditions under the Electricity Regulation (Articles 21–26). The Commission’s Capacity Mechanism Guidelines require: (a) demonstration of a resource adequacy concern through a European Resource Adequacy Assessment (ERAA) conducted by ENTSO-E; (b) design that does not constitute a disguised operating aid to fossil generation; (c) cross-border participation (at least 10% of capacity from other Member States); (d) technology neutrality and carbon emission limits (550g CO₂/kWh); and (e) ex ante assessment by ACER.

The Tempus Energy (Case C-57/19) and Poland Capacity Mechanism (Case T-204/21) cases confirmed that Member States must justify the need for capacity mechanisms and demonstrate that market-based solutions (demand response, storage, interconnectors) are insufficient.

Unbundling and Third-Party Access

Unbundling (Article 9 Electricity Directive) requires legal and functional separation of transmission from generation/supply. The three accepted models are: (a) ownership unbundling (OU) — the same person may not simultaneously control a generation/supply undertaking and a transmission system operator; (b) independent system operator (ISO) — the asset remains vertically integrated but is operated by an independent entity; (c) independent transmission operator (ITO) — the vertically integrated undertaking retains ownership but the TSO operates under strict independence guarantees. The Commission v Germany (Case C-174/21) and Commission v France cases have enforced unbundling against state-controlled TSOs with insufficient independence guarantees.

Consumer Protection and Retail Markets

Retail electricity markets are subject to rules on supplier switching (maximum three weeks), clear billing, price transparency, dispute resolution (ombudsman), and prohibition of supplier-led disconnection for vulnerable customers during winter periods. The 2019 Directive introduced the energy community as a legal entity enabling citizens, businesses, and local authorities to engage directly in generation, distribution, supply, and demand aggregation, with rights to access networks and participate in all market segments.