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-This paper starts from the observation that the Member States of the European Union have similar electricity market architectures but that these markets are weakly integrated. The authors start with a discussion of the regulation that is driving the ongoing liberalization process and then move on with a discussion of the resulting market architecture. The status of the internal electricity market in Europe is evaluated in terms of market structure, development and design. It is argued that there is a lot of potential in improving the links between Member State submarkets, making better use of existing grid infrastructure. It is also argued that investments in grid bottlenecks are necessary but that existing regulation is not adequate to ensure and coordinate cross-border transmission investments.

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In a liberalized market, generation and transmission investment decisions are decoupled, so that more grid is necessary. The European transmission grid is the backbone of the Internal Electricity Market that besides serving the market has to ensure security of supply and to allow connecting renewables. Transmission grid investments are clearly needed, especially to increase the scarcely available cross-border transfer capacities. The regulatory framework in which these investments are to take place is discussed in this paper. The authors evaluate whether the regulation that is already in place will deliver the investments crucial for the success of the liberalization process in Europe.