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A Mechanism for Allocating Benefits and Costs from Transmission Interconnections under Cooperation: A Case Study of the North Sea Offshore Grid

We propose a generic mechanism for allocating the benefits and costs that result from the development of international transmission interconnections under a cooperative agreement. The mechanism is based on a planning model that considers generation investments as a response to transmission developments, and the Shapley Value from cooperative game theory. This method provides a unique allocation of benefits and costs considering each country's average incremental contribution to the cooperative agreement. The allocation satisfies an axiomatic definition of fairness. We demonstrate our results for three planned transmission interconnections in the North Sea and show that the proposed mechanism can be used as a basis for defining a set of Power Purchase Agreements among countries. This achieves the desired final distribution of economic benefits and costs from transmission interconnections as countries trade power over time. We also show that, in this case, the proposed allocation is stable.

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Energy Specializations: Electricity – Policy and Regulation; Electricity – Transmission and Network Management

JEL Codes: Q48: Energy: Government Policy, Q41: Energy: Demand and Supply; Prices, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, F18: Trade and Environment

Keywords: Cooperative game theory, Cost-benefit allocation, Transmission expansion planning

DOI: 10.5547/01956574.39.6.mkri

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Published in Volume 39, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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