Decentralised Cross-Border Interconnection

Abstract

Reaping the full benefits from cross-border interconnection typically requires reinforcement of national networks. When the relevant parts of the networks are complements, a lack of coordination between national transmission system operators typically results in investment below optimal levels in both interconnectors and national infrastructure. A subsidy to financially sustain interconnector building is not sufficient to restore optimality; indeed, even when possible, such subsidisation may have to be restrained so as not to encourage cross-border capacities that will not be fully utilised due to lack of investment in national systems.Acknowledgement: We are grateful for helpful comments from Fridrik Baldursson and participants at CRESSE 2016, as well as four anonymous referee.