National-Strategic Investment in European Power Transmission Capacity

Daniel Huppmann and Jonas Egerer

No 1379, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: The transformation of the European energy system requires substantial investment in transmission capacity to facilitate cross-border trade and to efficiently integrate renewable energy sources. However, network planning in the EU is still mainly a national prerogative. In contrast to other studies aiming to identify the pan-European (continental) welfare-optimal transmission expansion, we investigate the impact of national regulators deciding on network investment strategically, with the aim of maximizing consumer surplus and generator profits in their jurisdiction. This reflects the inadequacy of current mechanisms to compensate for welfare re-allocations across national boundaries arising from network upgrades. We propose a three-stage equilibrium model to describe the Nash game between zonal planners (i.e., national governments, regulators, or system operators), each taking into account the impact of network expansion on the electricity spot market and the resulting welfare effects on the constituents within her jurisdiction. Using a four-node sample network, we identify several Nash equilibria of the game between the zonal planners, and illustrate the failure to reach the first-best welfare expansion in the absence of an effective compensation mechanism.

Keywords: Electricity transmission; network expansion; Generalized Nash equilibrium (GNE); mixed-integer equilibrium problem under equilibrium constraints (MI-EPEC) (search for similar items in EconPapers)
JEL-codes: C61 C72 L51 (search for similar items in EconPapers)
Pages: 23 p.
Date: 2014
New Economics Papers: this item is included in nep-ene, nep-gth and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: National-strategic investment in European power transmission capacity (2015)
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