Do local benefits justify voluntary agreements in transmission interconnection investments?

Manuel V. Loureiro

Supervisors:Paul Fischbeck (CMU)

João Claro (FEUP)

2

Current Situation

Integration of national transmission networks is desired by the European Union Increase competition Increase social welfare

In the Barcelona European Council (2002) a target of 10% of installed interconnection capacity (based on the existing production capacity in 2005) was defined

This policy target has failed

3

Current Situation

Low interconnection capacity Market power is not mitigated There are congestion costs Price differentials remain Requires higher reserve capacity

4

Current Situation

Price coupling of day-ahead electricity markets from Portugal to Finland has already been achieved

Is there competition in the electricity markets? Number of generation companies is

small Incumbents increased

concentration after the liberalization process

Could this reduce incentives for interconnection?

5

How to increase interconnection capacity?

Should interconnection capacity be regulated or enforced by the European Union?

Could voluntary agreements for cross-border investment be signed between member states?

Are there reasonable incentives for member states to voluntarily invest in interconnection capacity?

6

Interconnection Transmission Expansion Problem in Market Coupled RegionsInterconnection Transmission Expansion Problem in Market Coupled RegionsInterconnection Transmission Expansion Problem in Market Coupled Regions

Let us define the problem

It is a Transmission Expansion Problem

A transmission line reinforces power transfer

between two regions

Each region has its particular transmission

planner

These regions operate in a single electricity market

Interconnection Transmission Expansion Problem in Market Coupled RegionsInterconnection Transmission Expansion Problem in Market Coupled Regions

7

Literature ReviewInvestments in Interconnections

• Buijs et al. (2011) a supraregional model is compared to a non-cooperative game model.• In a Nash Equilibrium a Player could have a negative impact in Social Welfare

• Buijs and Belmans (2012) a new planning scheme is considered• Cases where Social Welfare is reduced cannot be solutions

Both schemes underperform when compared to the supraregional model

8

Literature ReviewNash Bargaining

• In Haurie and Zaccour (1991) two power utilities use bargaining to decrease generation and investment costs

• In Bai et al. (1997) contracts are established, in prices and quantities, for transmission of power

• Bargaining of right-of-way valuation between transmission line investors and land owners has also been studied (Molina, Contreras and Rudnick, 2012, 2013a, 2013b)

9

Strategy

Single decision-maker interested in maximizing total Social Welfare

Two decision-makers cooperate in the interest of maximizing their own

Social Welfare

Supraregional Model Local Model with Bargaining

What is the optimal capacity investment ?

How much should each player invest?

How are these models related?

10

Nash Bargaining

Model

Strategy

Supraregional Model Local Model with Bargaining

Wand WavingOptimality Conditions

and Substitutions

New Constraints:• Optimal Result is the same

11

Source: Own figures using data available at http://www.mibel.com/

Preparing DataRegression of Supply and Demand

Saturdays of January 2013 in Off-Peak Hours

12

Preliminary ResultsImpact of Transmission Capacity

-500 0 500 1000 1500 2000 2500 3000 3500 4000 4500-1

0

1

2

3

4

5

6

7x 10

6 Increase in Social Welfare by invested Transmission Capacity

Transmission Capacity (MWh)

Incr

ease

in S

ocia

l Wel

fare

with

out I

nves

tmen

t Cos

ts (€

)

SpainPortugal

-500 0 500 1000 1500 2000 2500 3000 3500 4000 4500-3

-2

-1

0

1

2

3

4x 10

6

Transmission Capacity (MWh)

Inve

stm

ent C

osts

(€)

Increase in Social Welfare by invested Transmission Capacity

SpainPortugal

13

Preliminary ResultsTrade-Off between Investors

-3 -2 -1 0 1 2 3 4

x 106

-0.5

0

0.5

1

1.5

2

2.5x 10

6

Investment Value of Spain (€)

Inve

stm

ent V

alue

of P

ortu

gal (

€) Increase in Transmission Cost

Both players invest

Investment requires compensation

14

-0.5 0 0.5 1 1.5 2 2.5 3 3.5 4-1

-0.5

0

0.5

1

1.5

2

Total Investment Value (M€)

Rat

io (%

)

Ratio of Investments by the Value of Total Investment

SpainPortugal

Preliminary ResultsRatios of Investment

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000-1

-0.5

0

0.5

1

1.5

2

Investment Cost per Unit of Transmission Capacity(€)

Rat

io (%

)

Ratio of Investments by the Unitary Cost of Investment

SpainPortugal

Player must compensate

Both players invest

Player is compensated

15

Do local benefits justify voluntary agreements in transmission interconnection investments?

If two regions decide to cooperate, the decision should be indistinguishible of a supraregional one

Both players have benefits with interconnections The importer desires a capacity equal to the capacity thar allows free-trade The exporter would prefer a smaller amount of capacity

Voluntary agreements are possible as long as the share of investments costs reflect the benefits of each region

These results are dependent of Perfect competition Economic rationality Indifference between of consumer and produces surpluses Acceptance of compensations and investments over each regions frontiers Lack of transmission losses and internal congestion

16

Conclusions and Further Research

• We present a novel model that is a first step to understand investments in interconnections considering local voluntary agreements

• Research in topic is relevant due to the efforts to establish the single European Electricity Market

• Further Research• Consider explicit transmission networks to study

• Impact of Internal Congestion• Impact of different Interconnection corridors