Manuel V. Loureiro
Supervisors:
Paul Fischbeck (CMU)
João Claro (FEUP)
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
2
Current Situation

Low interconnection capacity




Market power is not mitigated
There are congestion costs
Price differentials remain
Requires higher reserve capacity
3
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?
4
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?
5
Let us define the problem
Interconnection Transmission Expansion Problem in Market Coupled Regions
It is a Transmission
Expansion Problem
Each region has its
particular transmission
planner
A transmission line
reinforces power transfer
between two regions
These regions operate in a single electricity market
6
Literature Review
Investments 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
7
Literature Review
Nash 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)
8
Strategy
Supraregional Model
Local Model with Bargaining
Single decision-maker interested in
maximizing total Social Welfare
Two decision-makers cooperate in
the interest of maximizing their own
Social Welfare
How are these
models related?
What is the optimal
capacity investment ?
How much should each
player invest?
9
Strategy
Supraregional Model
Local Model with Bargaining
Wand Waving
Optimality ConditionsNash
Bargaining
and Substitutions
Model
New Constraints:
•
Optimal Result is the same
10
Preparing Data
Regression of Supply and Demand

Saturdays of January 2013 in Off-Peak Hours
Source: Own figures using data available at http://www.mibel.com/
11
Preliminary Results
Impact of Transmission Capacity
6
x 10 Increase in Social Welfare by invested Transmission Capacity
4
Spain
Portugal
6
5
Spain
Portugal
2
4
3
2
1
0
-1
1
-2
0
-1
-500
6
x 10 Increase in Social Welfare by invested Transmission Capacity
3
Investment Costs (€)
Increase in Social Welfare without Investment Costs (€)
7
0
500
1000 1500 2000 2500 3000
Transmission Capacity (MWh)
3500
4000
4500
-3
-500
0
500
1000 1500 2000 2500 3000
Transmission Capacity (MWh)
3500
4000
12
4500
Preliminary Results
Trade-Off between Investors
6
2.5
x 10
Both players invest
Investment Value of Portugal (€)
2
Increase in Transmission Cost
1.5
1
0.5
0
-0.5
-3
Investment requires
compensation
-2
-1
0
1
2
Investment Value of Spain (€)
3
4
6
x 10
13
Preliminary Results
Ratios of Investment
Ratio of Investments by the Unitary Cost of Investment
Ratio of Investments by the Value of Total Investment
2
2
Spain
Portugal
Spain
Portugal
1.5
1.5
Player must compensate
0.5
Both players invest
0
1
Ratio (%)
Ratio (%)
1
0.5
0
Player is compensated
-0.5
-1
-0.5
0
500
1000 1500 2000 2500 3000 3500 4000 4500 5000
Investment Cost per Unit of Transmission Capacity(€)
-1
-0.5
0
0.5
1
1.5
2
2.5
Total Investment Value (M€)
3
3.5
14
4
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
15
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
16