The paper concentrates on four aspects of mitigating market power in European electricity networks: capacity divestiture, entry, promoting interconnection, and the capacity to regulate competition in generation, drawing on lessons from Britain, California and the Continent. Each of these actions can improve the intensity of competition in electricity wholesale markets, but attractive strategies to promote any one of these may, unless carefully designed, be in conflict with other strategies, with possibly long-term disadvantages. Trading divestiture for the right to vertically integrate, or promoting contracts at the expense of a transparent spot and balancing market may increase short-run competition at the expense of entry. Gas liberalisation would greatly facilitate efficient electricity markets. Introduction The European electricity market is being liberalised primarily by pressure from the European Commission through the Electricity Directive 96/92/EC. The case for electricity liberalisation was based on the success of Britain and Norway in introducing competition into the wholesale electricity market, combined with the observation that electricity prices differed widely across the Continent. If customers were free to buy from cheaper suppliers, then wholesale and retail prices would fall in response to competition, and producers in different countries would have access to similarly priced electricity. This would fulfil the aims of the single market -"the free movement of goods, persons, services and capital," and hence increase European competitiveness. The analysis was sound, but for electricity liberalisation to deliver sustainable and competitive prices, a number of important pre-conditions must be met. The first is that there is adequate and secure capacity relative to peak demand. Electricity cannot readily be stored (except as storage hydro), so reserves must be sufficient to meet generation outages, unexpected surges in demand, and, in a liberalised market, strategic bidding or capacity withholding as demand increases relative to available capacity. Second, for the wholesale market to be competitive, potential suppliers must have access to the transmission system in order to reach customers. This certainly requires legal unbundling of transmission from generation at the least, though ownership separation is preferable. This also applies to import capacity, and requires that customers have access to foreign suppliers and that incumbent generators do not * Paper prepared for the conference Towards a European Market of Electricity: What have we Learnt from Recent Lessons? Spot Market Design, Derivatives and Regulation organized by the SSPA Italian Advanced School of Public Administration on June 24-5, 2002. Support from the ESRC under the project R000 238563 Efficient and sustainable regulation and competition in network industries, and the CMI project 045/P Promoting Innovation and Productivity in Electricity Markets is gratefully acknowledged. I am indebted to Richard Green for helpful comments.