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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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  1. de Nooij, Michiel & Baarsma, Barbara, 2009. "Divorce comes at a price: An ex ante welfare analysis of ownership unbundling of the distribution and commercial companies in the Dutch energy sector," Energy Policy, Elsevier, vol. 37(12), pages 5449-5458, December.
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  13. Berenstein, Severin & Bushnell, James & Stoft, Steven, 2000. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," Staff General Research Papers 13145, Iowa State University, Department of Economics.
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  17. Laura Malaguzzi Valeri, 2008. "Welfare and Competition Effects of Electricity Interconnection between Great Britain and Ireland," Papers WP232, Economic and Social Research Institute (ESRI).
  18. Kristiansen, Tarjei, 2007. "Cross-border transmission capacity allocation mechanisms in South East Europe," Energy Policy, Elsevier, vol. 35(9), pages 4611-4622, September.
  19. Sanghoon Ahn, 2002. "Competition, Innovation and Productivity Growth: A Review of Theory and Evidence," OECD Economics Department Working Papers 317, OECD Publishing.
  20. Stigler, George J, 1976. "The Xistence of X-Efficiency," American Economic Review, American Economic Association, vol. 66(1), pages 213-16, March.
  21. 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.
  22. 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.
  23. 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.
  24. Michiel de Nooij, 2010. "Social cost benefit analysis of interconnector investment: A critical appraisal," Bremen Energy Working Papers 0002, Bremer Energie Institut.
  25. 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.
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