Differences in the way capacity is sold, which vary from one country to the next, must also be ironed out if the EU's vision of free trade across the continent is to be kept alive, they told an energy conference in Budapest this week.

"There are a lot of risks and obstacles, this reduces our possibilities for free trade," said Jaroslav Dybowski, executive director of Czech trade house Entrade.

"There are a number of different (cross-border capacity) allocation methods, it's really quite a challenge," he said.

Traders said prices for capacity, particularly on the Czech/German border, had risen sharply this year, partly as a result of strains on the system due to wild fluctuations in output from wind turbines.

Dybowski said grid operators were raising enough money through capacity auctions to fund new lines.

Austria's grid company said gaining permission to build new lines, rather than financing was the problem. "There is a lengthy and exhausting permission licensing procedure," said Tahir Kapetanovic, director of electricity at Austria's E-control.

POCKETS OF TRADE

Despite grid problems, pockets of trade have emerged. Companies which own power plants or have ambitions to do so, are among the most active, dealers said. Germany's RWE and E.ON, Belgium's Electrabel and Swiss firm Atel are among those trading in the region.

US firm Sempra is also building a presence, traders said.

Poland is the most liquid market in the east and activity there should pick up next year after some long-term supply deals, which have kept big volumes away from the open market, are wound up.

"Most of the trade is for day and month ahead contracts," said Jan Kozusnik, a power trader for Electrabel.

Brokerage TFS plans to enter the Polish market later this year to challenge the position of GFI, the only international brokerage currently serving the market. TFS recently launched a screen-based service in the Czech market.

Volumes on the Polish power exchange remains light, dealers said.

Trading is also flickering to life in Hungary.

"Hungary has the potential to become an important turntable for links between northeast and southeast Europe," said Benedikt Messner, E.ON's head of trading in eastern Europe.

But he said Hungary's limited cross-border capacity could limit its progress as a trading hub.

Hungary, which has traditionally been an importer from exporters such as Poland and the Czech Republic, is buying more electricity this year from countries in southeast Europe including Romania, said Messner.

Imports from the southeast had forced prices in Hungary below prices in Germany for the first time, a shift which could put pressure on prices in northwest Europe, he said.

Europe's southeastern corner was reconnected to the main European network last year after war in the former Yugoslavia halted transmission 13 years earlier.

The European Commission and the Balkan countries are expected to sign a treaty this year which will aim to create a regional market in the southeast.