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interconnection investment in europe, optimizing capacity from a private or a public perspective?

Interconnection investment in Europe, Optimizing capacity from a private or a public perspective?
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De Jong, H.M. and R.A. Hakvoort: Interconnection investment in Europe, Optimizing capacity from a private or a public perspective?, pp. 1-8. In: Proceedings of Energex 2006, the 11th international energy conference and exhibition, 12-15 June (2006). At: Stavanger, Norway. [Monterey, USA: InControl Productions, Inc., 2006. Eds.: Einar Jordanger and J.O.G. Tande. ISBN: 0-08-045108-x. International (refereed) Proceeding

Hanneke de Jong

Scarcity of interconnection capacity between neigh-bouring electricity systems has been identified as one of the reasons for hampering market integration in Europe. This observation combined with the lack of much new public interconnection investment has induced the European legislator to opt for commercial alternatives. However, private investments in interconnection capacity are not straightforward. A public cost-benefit analysis for interconnection significantly differs from a private cost-benefit analysis. Consequently, the optimal investment capacity from a public perspective and a private perspective significantly differs which is shown in this paper by a quantitative analysis. Although it is true that in the short term a merchant interconnec-tion increases the (physical) coupling of different electricity markets, the parties involved have a considerable interest to keep separate markets since the merchant investment must be recouped from exploitation of the trade potential across the link. A merchant interconnection could, thus, have the character of a Trojan horse, yielding more inter-connection capacity in the short term, but proving an obstacle to real market integration in the long term. European policymakers need to be aware of that in their quest for European electricity market integration. There seems to be a need for creative alternatives that allow for merchant participation in interconnection investment while at the same time securing the long-term social welfare objective.

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