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National-Strategic Investment in European Power Transmission Capacity

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  • Daniel Huppmann
  • Jonas Egerer

Abstract

The transformation of the European energy system requires substantial investment in transmission capacity to facilitate cross-border trade and to efficiently integrate renewable energy sources. However, network planning in the EU is still mainly a national prerogative. In contrast to other studies aiming to identify the pan-European (continental) welfare-optimal transmission expansion, we investigate the impact of national regulators deciding on network investment strategically, with the aim of maximizing consumer surplus and generator profits in their jurisdiction. This reflects the inadequacy of current mechanisms to compensate for welfare re-allocations across national boundaries arising from network upgrades. We propose a three-stage equilibrium model to describe the Nash game between zonal planners (i.e., national governments, regulators, or system operators), each taking into account the impact of network expansion on the electricity spot market and the resulting welfare effects on the constituents within her jurisdiction. Using a four-node sample network, we identify several Nash equilibria of the game between the zonal planners, and illustrate the failure to reach the first-best welfare expansion in the absence of an effective compensation mechanism.

Suggested Citation

  • Daniel Huppmann & Jonas Egerer, 2014. "National-Strategic Investment in European Power Transmission Capacity," Discussion Papers of DIW Berlin 1379, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1379
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    References listed on IDEAS

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    More about this item

    Keywords

    Electricity transmission; network expansion; Generalized Nash equilibrium (GNE); mixed-integer equilibrium problem under equilibrium constraints (MI-EPEC);
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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