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When regulators do not agree: Are merchant interconnectors an option? Insights from an analysis of options for network expansion in the Baltic Sea region

C. Gerbaulet and A. Weber

Energy Policy, 2018, vol. 117, issue C, 228-246

Abstract: Despite the ongoing appetite of financial investors and project developers for merchant investments into the European electricity network, the European Commission is reluctant to approve such undertakings, thus implicitly favoring regulated investments. Based on a two-level model, we analyze the impact of profit-maximizing merchant transmission investment as compared to both welfare-maximizing regulated transmission investment and the absence of enhanced (direct current) interconnection between different synchronous areas. We apply the model to the Baltic Sea region, which is historically subject to rapid interconnector development and would benefit from increased interconnection. We obtain stable results indicating that merchant investment may well positively contribute to overall welfare, but at the same time, “the merchant takes it all,” i.e. in many cases merchant profits are close to the overall efficiency gain. This implies that, depending on political objectives, building no interconnector may be superior to building a merchant interconnector if a regulated solution does not seem to be feasible, such as in a case of inter-jurisdictional coordination issues. This underlines that distributional aspects, beyond mere welfare arguments, should be taken into account when analyzing the impact of merchant transmission investment.

Keywords: Merchant transmission expansion; Regulated transmission expansion; Baltic Sea region; Welfare and distribution (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:enepol:v:117:y:2018:i:c:p:228-246