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Determining Optimal Interconnection Capacity on the Basis of Hourly Demand And Supply Functions of Electricity

Interconnections for cross-border electricity trade improve price convergence and welfare. Increased production from variable renewables however implies higher levels of optimal interconnection capacity than in the past. Rather than using scenario building to determine new optimal levels of interconnection capacity, this paper presents a new methodology for Cost-Benefit Analysis (CBA) based on empirical market data, using the French-German electricity trade as an example. Employing a very fine dataset of hourly supply and demand curves (aggregated auction curves) from the EPEX Spot market, it constructs net export (NEC) and net import demand curves (NIDC) for both countries. This allows assessing hourly welfare impacts for incremental capacity and, summed over the year, the annual welfare benefits for each discrete increase in interconnection capacity. Confronting benefits with the annualised costs of increasing interconnection capacity determines the socially optimal increase in interconnection capacity between France and Germany on the basis of empirical market micro-data.

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Energy Specializations: Electricity – Distributed Generation; Energy Investment and Finance – Public and Private Risks, Risk Management

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, Q54: Climate; Natural Disasters and Their Management; Global Warming, D44: Auctions, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

Keywords: Electricity Interconnections, Variable Renewables, Optimal Infrastructure Provision, Hourly Net Export and Import Demand Curves, Cost- Benefit Analysis

DOI: 10.5547/01956574.39.3.jkep

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Published in Volume 39, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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