Manuel V. Loureiro Supervisors: Paul Fischbeck (CMU) João Claro (FEUP)

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 2

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

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? 4

How to increase 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? 5 Are there reasonable incentives for member states to voluntarily invest in interconnection capacity?

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

Literature Review Investments in Interconnections 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 7 Both schemes underperform when compared to the supraregional model

Literature Review Nash 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) 8

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

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

Source: Own figures using data available at Preparing Data Regression of Supply and Demand  Saturdays of January 2013 in Off-Peak Hours 11

Preliminary Results Impact of Transmission Capacity 12

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

Preliminary Results Ratios of Investment 14 Player must compensate Both players invest Player is compensated

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 dependent of  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 15

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 16