Evaluating an Interconnection Project: Do Strategic Interactions Matter?

Abstract

High-Voltage Direct Current (HVDC) merchant transmission lines allow trade across separate power markets and often in different countries. Flows on existing cross-border lines are often assessed as suboptimal, which may be due to the light regulation that often prevails in these cases. This paper studies the impact of market power on HVDC interconnections as a determinant of imperfect arbitrage. We assess the impact of Physical Transmission Rights (PTRs) allocation on the management of an HVDC interconnection between a thermal and a hydroelectricity market, assuming dynamic water management. We use a two-stage game formulated as an Equilibrium Problem with Equilibrium Constraints (EPEC) to model the strategic trade between the New York (US) and Quebec (Canada) systems. The numerical model is calibrated with public data. We find that although the interconnection can create wealth, a high concentration of PTRs can destroy value because of dumping strategies. The impact of trade on local price levels may be of concern and calls for the functional unbundling of traders and generators.

Strategic storage use in a hydro-thermal power system with carbon constraints

“…We simplify the New York Control Area (NYCA) transmission representation (NYSRC, 2012) by treating flows to or from nodes outside of New York and Québec as exogenous parameters netted from consumption (Bushnell and Chen, 2012;Debia et al, 2018). Furthermore, given the "standard grouping" in Figure 1, we treat New York zones A-E and G-I as single nodes in order to obtain the stylized six-node network in Figure 2.…”

“…Nasrolahpour et al (2016) examine how a merchant storage investor could affect market prices through its capacity-sizing decision as a Stackelberg leader in Alberta. The potential for other flexible technologies, such as combined heat and power plants (Virasjoki et al, 2018) and DC interconnections (Debia et al, 2018), to increase the leverage of strategic agents has been demonstrated in game-theoretic models of the Nordic and New York-Québec power systems, respectively. Nevertheless, even in such papers that bridge the physical realism of engineering-type models and the market realism of economic models, either hydro reservoirs or transmission flows are not modeled fully.…”

“…Nevertheless, even in such papers that bridge the physical realism of engineering-type models and the market realism of economic models, either hydro reservoirs or transmission flows are not modeled fully. For example, hydro plants are treated as generic flexible technologies with seasonal availability factors (Bjørndal et al, 2014;Virasjoki et al, 2018), while New York-Québec is represented by three nodes (Debia et al, 2018).…”

Decentralised Cross-Border Interconnection

“…Our analysis is closely related to the literature on local provision of public goods, starting with Williams (1966). 12 A recent contribution to this literature is Bloch and Zenginobuz (2007), who consider the impact of spillovers on the supply of public goods in a non-cooperative game between different governments in which spillovers may be symmetric or asymmetric and jurisdictions may differ in size; they conclude that the complexity of interactions will plague the design of institutions for multijurisdictional local public good economies with spillovers. A distinguishing feature of our model is that we assume that governments may be able to reach an efficient solution for the public good itself (the interconnector), but that overall optimality is not achieved because of the interaction (spillovers) between local networks and the interconnector.…”

“…It is based on an analytical framework designed by Caillaud, Jullien and Picard (1996).11 Castaneda et al (2015) use empirical studies from behavioral economics and psychology to show that systems with independent regulatory agencies weaken the effects of political power, and diminish information asymmetries which improves sector performance 12. Other early contributions includeBrainard and Dolbear (1967) andBoskin (1973).…”