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

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  • de Nooij, Michiel

Abstract

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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  • de Nooij, Michiel, 2011. "Social cost-benefit analysis of electricity interconnector investment: A critical appraisal," Energy Policy, Elsevier, vol. 39(6), pages 3096-3105, June.
  • Handle: RePEc:eee:enepol:v:39:y:2011:i:6:p:3096-3105
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    Cited by:

    1. Nepal, Rabindra & Jamasb, Tooraj, 2015. "Caught between theory and practice: Government, market, and regulatory failure in electricity sector reforms," Economic Analysis and Policy, Elsevier, vol. 46(C), pages 16-24.
    2. Ochoa, Camila & Gore, Olga, 2015. "The Finnish power market: Are imports from Russia low-cost?," Energy Policy, Elsevier, vol. 80(C), pages 122-132.
    3. repec:gam:jeners:v:10:y:2017:i:9:p:1438-:d:112307 is not listed on IDEAS
    4. Luis M. Abadie & José M. Chamorro, 2011. "Valuing Expansions of the Electricity Transmission Network under Uncertainty: The Binodal Case," Energies, MDPI, Open Access Journal, vol. 4(10), pages 1-32, October.
    5. Rabindra, Nepal & Tooraj, Jamasb, 2013. "Caught Between Theory and Practice: Government, Market, and Regulatory Failure in Electricity Sector Reforms," SIRE Discussion Papers 2013-22, Scottish Institute for Research in Economics (SIRE).
    6. Egerer, Jonas & Kunz, Friedrich & Hirschhausen, Christian von, 2013. "Development scenarios for the North and Baltic Seas Grid – A welfare economic analysis," Utilities Policy, Elsevier, vol. 27(C), pages 123-134.
    7. Banez-Chicharro, Fernando & Olmos, Luis & Ramos, Andres & Latorre, Jesus M., 2017. "Estimating the benefits of transmission expansion projects: An Aumann-Shapley approach," Energy, Elsevier, vol. 118(C), pages 1044-1054.
    8. Chamorro, José M. & Abadie, Luis M. & de Neufville, Richard & Ilić, Marija, 2012. "Market-based valuation of transmission network expansion. A heuristic application in GB," Energy, Elsevier, vol. 44(1), pages 302-320.
    9. Schroeder, Andreas & Oei, Pao-Yu & Sander, Aram & Hankel, Lisa & Laurisch, Lilian Charlotte, 2013. "The integration of renewable energies into the German transmission grid—A scenario comparison," Energy Policy, Elsevier, vol. 61(C), pages 140-150.
    10. Dominković, D.F. & Bačeković, I. & Ćosić, B. & Krajačić, G. & Pukšec, T. & Duić, N. & Markovska, N., 2016. "Zero carbon energy system of South East Europe in 2050," Applied Energy, Elsevier, vol. 184(C), pages 1517-1528.
    11. Fischhendler, Itay & Herman, Lior & Anderman, Jaya, 2016. "The geopolitics of cross-border electricity grids: The Israeli-Arab case," Energy Policy, Elsevier, vol. 98(C), pages 533-543.
    12. Nepal, Rabindra & Jamasb, Tooraj, 2012. "Interconnections and market integration in the Irish Single Electricity Market," Energy Policy, Elsevier, vol. 51(C), pages 425-434.
    13. Lidia Puka & Kacper Szulecki, 2014. "Beyond the "Grid-Lock" in Electricity Interconnectors: The Case of Germany and Poland," Discussion Papers of DIW Berlin 1378, DIW Berlin, German Institute for Economic Research.
    14. Dutton, Joseph & Lockwood, Matthew, 2017. "Ideas, institutions and interests in the politics of cross-border electricity interconnection: Greenlink, Britain and Ireland," Energy Policy, Elsevier, vol. 105(C), pages 375-385.

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