Working Paper: CEPR ID: DP16289
Authors: Henrik Horn; Thomas Tangers
Abstract: This paper develops a framework for analyzing the incentives of national transmission system operators (TSOs) to supply cross-border interconnection capacity in an international electricity market. Our results show that equilibrium transmission capacity is downward distorted, even in situations where full capacity utilization is inefficient. We derive a method for quantifying these distortions and propose a market design that uniquely implements efficient dispatch of electricity. In this design, the distribution of trade adjustment payments causes TSOs to internalize the full effect of network congestion. The design would improve, for instance, on the current European market design.
Keywords: international electricity market; market design; market power; network congestion
JEL Codes: F12; F15; L43; L94; Q27; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TSO behavior (L29) | efficiency of electricity market integration (L94) |
| TSO behavior (L29) | allocation of interconnection capacity (L97) |
| TSO actions (F38) | equilibrium transmission capacity (D51) |
| TSOs' strategic withholding of capacity (L90) | inefficiencies in market outcomes (D61) |
| TSOs' capacity decisions (L90) | market prices (P22) |
| TSOs' capacity decisions (L90) | congestion (L91) |
| proposed market design (D47) | TSOs' internalization of network congestion effects (L91) |
| proposed market design (D47) | efficient dispatch of electricity (L94) |