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Social cost-benefit analysis of electricity interconnector investment: A critical appraisal

  • de Nooij, Michiel

This paper examines the economic analysis (social cost-benefit analysis) underlying two decisions to build an interconnector (NorNed and the East-West interconnector) in Europe. The main conclusion is that current interconnector and transmission investment decisions in Europe are unlikely to maximize social welfare. The arguments are as follows. (i) It is unclear how much demand for transmission capacity and interconnectors actually exists, and thus the benefits of investment are unclear. (ii) Both analyses underlying the investments studied are incorrect, to the point where, in one case, even the sign may be wrong. (iii) The main criticism concerns the fact that they do not take the resulting changes in generator investment plans into account and ignore the (potential) benefits of increased competition. (iv) Several smaller issues can be improved, such as the discount rate used. (v) Decisions at the European level are taken very differently, and approval may depend on which authority grants approval. (vi) Interconnector decisions receive the most attention, although most money goes to transmission investments. Two research recommendations for future improvements are formulated.

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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 39 (2011)
Issue (Month): 6 (June)
Pages: 3096-3105

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Handle: RePEc:eee:enepol:v:39:y:2011:i:6:p:3096-3105
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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  8. Turvey, Ralph, 2006. "Interconnector economics," Energy Policy, Elsevier, vol. 34(13), pages 1457-1472, September.
  9. Littlechild, S., 2004. "Regulated and merchant interconnectors in Australia: SNI and Murraylink revisited," Cambridge Working Papers in Economics 0410, Faculty of Economics, University of Cambridge.
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  13. de Nooij, Michiel & Koopmans, Carl & Bijvoet, Carlijn, 2007. "The value of supply security: The costs of power interruptions: Economic input for damage reduction and investment in networks," Energy Economics, Elsevier, vol. 29(2), pages 277-295, March.
  14. Stigler, George J, 1976. "The Xistence of X-Efficiency," American Economic Review, American Economic Association, vol. 66(1), pages 213-16, March.
  15. Hirst, Eric, 2000. "Do We Need More Transmission Capacity?," The Electricity Journal, Elsevier, vol. 13(9), pages 78-89, November.
  16. Thomas-Olivier Léautier & Véronique Thelen, 2009. "Optimal expansion of the power transmission grid: why not?," Journal of Regulatory Economics, Springer, vol. 36(2), pages 127-153, October.
  17. Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge.
  18. Keller, Katja & Wild, Jorg, 2004. "Long-term investment in electricity: a trade-off between co-ordination and competition?," Utilities Policy, Elsevier, vol. 12(4), pages 243-251, December.
  19. Kirschen, Daniel & Strbac, Goran, 2004. "Why Investments Do Not Prevent Blackouts," The Electricity Journal, Elsevier, vol. 17(2), pages 29-36, March.
  20. Kristiansen, Tarjei, 2007. "Cross-border transmission capacity allocation mechanisms in South East Europe," Energy Policy, Elsevier, vol. 35(9), pages 4611-4622, September.
  21. Tanaka, Makoto, 2009. "Transmission-constrained oligopoly in the Japanese electricity market," Energy Economics, Elsevier, vol. 31(5), pages 690-701, September.
  22. Ojeda, Osvaldo A. & Olsina, Fernando & Garcés, Francisco, 2009. "Simulation of the long-term dynamic of a market-based transmission interconnection," Energy Policy, Elsevier, vol. 37(8), pages 2889-2899, August.
  23. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November.
  24. Derek Bunn & Georg Zachmann, 2010. "Inefficient arbitrage in inter-regional electricity transmission," Journal of Regulatory Economics, Springer, vol. 37(3), pages 243-265, June.
  25. Michiel de Nooij, 2010. "Social cost benefit analysis of interconnector investment: A critical appraisal," Bremen Energy Working Papers 0002, Bremer Energie Institut.
  26. Paul L. Joskow, 1997. "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 119-138, Summer.
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