Do local benefits justify voluntary agreements in transmission interconnection investments?

1. Do local benefits justify voluntary agreements in transmission interconnection investments? Manuel V. Loureiro Supervisors: Paul Fischbeck (CMU) João Claro (FEUP)

2. Current Situation • Integration of national transmission networks is desired by the European Union • Increase competition • Increase social welfare • In the Barcelona European Council (2002) a target of 10% of installed interconnection capacity (based on the existing production capacity in 2005) was defined • This policy target has failed

3. Current Situation • Low interconnection capacity • Market power is not mitigated • There are congestion costs • Price differentials remain • Requires higher reserve capacity

4. Current Situation • Price coupling of day-ahead electricity markets from Portugal to Finland has already been achieved • Is there competition in the electricity markets? • Number of generation companies is small • Incumbents increased concentration after the liberalization process • Could this reduce incentives for interconnection?

5. How to increase interconnection capacity? Are there reasonable incentives for member states to voluntarily invest in interconnection capacity? • Should interconnection capacity be regulated or enforced by the European Union? • Could voluntary agreements for cross-border investment be signed between member states?

6. Let us define the problem Interconnection Transmission Expansion Problem in Market Coupled Regions Interconnection Transmission Expansion Problem in Market Coupled Regions Interconnection Transmission Expansion Problem in Market Coupled Regions Interconnection Transmission Expansion Problem in Market Coupled Regions InterconnectionTransmission Expansion Problem in Market Coupled Regions Each region has its particular transmission planner A transmission line reinforces power transfer between two regions These regions operate in a single electricity market It is a Transmission Expansion Problem

7. Literature ReviewInvestments in Interconnections • Both schemes underperform when compared to the supraregional model • Buijs et al. (2011) a supraregional model is compared to a non-cooperative game model. • In a Nash Equilibrium a Player could have a negative impact in Social Welfare • Buijs and Belmans (2012) a new planning scheme is considered • Cases where Social Welfare is reduced cannot be solutions

8. Literature ReviewNash Bargaining • In Haurie and Zaccour (1991) two power utilities use bargaining to decrease generation and investment costs • In Bai et al. (1997) contracts are established, in prices and quantities, for transmission of power • Bargaining of right-of-way valuation between transmission line investors and land owners has also been studied(Molina, Contreras and Rudnick, 2012, 2013a, 2013b)

9. Strategy Local Model with Bargaining Supraregional Model • Single decision-maker interested in maximizing total Social Welfare • Two decision-makers cooperate in the interest of maximizing their own Social Welfare How are these models related? How much should each player invest? What is the optimal capacity investment ?

10. Strategy Local Model with Bargaining Supraregional Model Wand Waving Optimality Conditions and Substitutions Nash Bargaining Model • New Constraints: • Optimal Result is the same

11. Preparing DataRegression of Supply and Demand Source: Own figures using data available at http://www.mibel.com/ • Saturdays of January 2013 in Off-Peak Hours

12. Preliminary ResultsImpact of Transmission Capacity

13. Preliminary ResultsTrade-Off between Investors Both players invest Increase in Transmission Cost Investment requires compensation

14. Preliminary ResultsRatios of Investment Player must compensate Both players invest Player is compensated

15. Do local benefits justify voluntary agreements in transmission interconnection investments? • If two regions decide to cooperate, the decision should be indistinguishible of a supraregional one • Both players have benefits with interconnections • The importer desires a capacity equal to the capacity thar allows free-trade • The exporter would prefer a smaller amount of capacity • Voluntary agreements are possible as long as the share of investments costs reflect the benefits of each region • These results are dependentof • Perfect competition • Economic rationality • Indifference between of consumer and produces surpluses • Acceptance of compensations and investments over each regions frontiers • Lack of transmission losses and internal congestion

16. Conclusions and Further Research • We present a novel model that is a first step to understand investments in interconnections considering local voluntary agreements • Research in topic is relevant due to the efforts to establish the single European Electricity Market • Further Research • Consider explicit transmission networks to study • Impact of Internal Congestion • Impact of different Interconnection corridors