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Minimising costs and variability of electricity generation by means of optimal electricity interconnection utilisation

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  • Muireann Á. Lynch

    ()
    (Department of Economics, University of Sussex, Falmer, United Kingdom)

  • Richard Tol

    ()
    (Department of Economics, University of Sussex, Falmer, United Kingdom
    Institute for Environmental Studies and Department of Spatial Economic, Vrije Universiteit, Amsterdam, The Netherlands
    Tinbergen Institute, Amsterdam, The Netherlands
    CESifo, Munich, Germany)

  • Mark J. O’Malley

Abstract

We examine the payoffs to electrical interconnection between isolated systems considering minimisation of both costs and variability. We demonstrate that optimal interconnection portfolios cannot be derived analytically and must be simulated numerically. We present a mixed-integer linear programme which maximises payoff to interconnection and simulates the operation of stylised electricity systems. Interconnection is considered as both an endogenous and an exogenous variable. Demand and wind portfolios of varying levels of correlation are considered. Endogenous interconnection is negligible under all demand and wind scenarios. Under exogenous interconnection, one region is found to gain at the expense of another regarding both cost minimisation and variance minimisation. Payoff from interconnection is found to be primarily due to supply side considerations, in particular the thermal generation portfolio.

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Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 6814.

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Date of creation: Apr 2014
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Handle: RePEc:sus:susewp:6814

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  1. Laura Malaguzzi Valeri, 2008. "Welfare and Competition Effects of Electricity Interconnection between Great Britain and Ireland," Papers, Economic and Social Research Institute (ESRI) WP232, Economic and Social Research Institute (ESRI).
  2. Richard Gilbert & Karsten Neuhoff & David Newbery, 2004. "Allocating Transmission to Mitigate Market Power in Electricity Markets," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 691-709, Winter.
  3. Lynch, Muireann Á. & Tol, Richard S.J. & O'Malley, Mark J., 2012. "Optimal interconnection and renewable targets for north-west Europe," Energy Policy, Elsevier, Elsevier, vol. 51(C), pages 605-617.
  4. Turvey, Ralph, 2006. "Interconnector economics," Energy Policy, Elsevier, Elsevier, vol. 34(13), pages 1457-1472, September.
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  6. Allcott, Hunt, 2011. "Rethinking real-time electricity pricing," Resource and Energy Economics, Elsevier, Elsevier, vol. 33(4), pages 820-842.
  7. Richard S.J. Tol & Muireann Lynch & Aonghus Shortt & Mark O’Malley, 2012. "Risk-Return Incentives in Liberalised Electricity Markets," Working Paper Series, Department of Economics, University of Sussex 4012, Department of Economics, University of Sussex.
  8. Lion Hirth, 2012. "The Market Value of Variable Renewables," Working Papers, Fondazione Eni Enrico Mattei 2012.15, Fondazione Eni Enrico Mattei.
  9. O'Mahoney, Amy & Denny, Eleanor, 2011. "Electricity Prices and Generator Behaviour in Gross Pool Electricity Markets," MPRA Paper 34847, University Library of Munich, Germany.
  10. Neuhoff, Karsten & Newbery, David, 2005. "Evolution of electricity markets: Does sequencing matter?," Utilities Policy, Elsevier, Elsevier, vol. 13(2), pages 163-173, June.
  11. Fabien Roques & Céline Hiroux & Marcelo Saguan, 2009. "Optimal Wind Power Deployment in Europe - a Portfolio Approach," RSCAS Working Papers, European University Institute 2009/17, European University Institute.
  12. Brunekreeft, Gert, 2005. "Regulatory issues in merchant transmission investment," Utilities Policy, Elsevier, Elsevier, vol. 13(2), pages 175-186, June.
  13. Kanagawa, Makoto & Nakata, Toshihiko, 2006. "Analysis of the impact of electricity grid interconnection between Korea and Japan--Feasibility study for energy network in Northeast Asia," Energy Policy, Elsevier, Elsevier, vol. 34(9), pages 1015-1025, June.
  14. Gert Brunekreeft & David Newbery, 2006. "Should merchant transmission investment be subject to a must-offer provision?," Journal of Regulatory Economics, Springer, Springer, vol. 30(3), pages 233-260, November.
  15. Spiecker, Stephan & Vogel, Philip & Weber, Christoph, 2013. "Evaluating interconnector investments in the north European electricity system considering fluctuating wind power penetration," Energy Economics, Elsevier, Elsevier, vol. 37(C), pages 114-127.
  16. Al-Sunaidy, A. & Green, R., 2006. "Electricity deregulation in OECD (Organization for Economic Cooperation and Development) countries," Energy, Elsevier, Elsevier, vol. 31(6), pages 769-787.
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