WATER ON FIRE - GAINS FROM ELECTRICITY TRADE

In light of the ongoing liberalization of electricity trade in the Nor dic countries, and perhaps in Northern Europe, we argue that gains fro m electricity trade may be different from those traditionally associat ed with comparative advantages and economies of scale. In particular, we consider gains arising from the exploitation of technological compl ementarities between hydro and thermal systems. Our theoretical framew ork highlights essential features of the two systems and allows for an analysis of effects of trade. We study three trading regimes, which m ay arise either endogenously or because of trade regulations: day-nigh t power exchange, seasonal energy banking and unbalanced trade. The an alysis suggests that gradual trade liberalization may be costly.