Cross-border electricity transmission investments

The objective of this paper is to analyse what targets and criteria should be followed for electricity transmission investments which would be beneficial for Europe. The paper indicates that there is serious underinvestment in the European transmission network from the overall welfare point of view. The paper demonstrates that in transmission investments there is an important dimension of welfare distribution between the countries connected but also within the countries due to the change in the market outcome when an interconnector is built. The paper shows that it is possible to develop objective criteria for interconnector investments. Social welfare benefits from price arbitrage should be one criterion but several other criteria should be used as well including price convergence, security of supply and competition benefits. Flaws in market design, capacity calculation and capacity allocation need to be addressed to provide efficient signals for interconnector investments. This should include designing of optimal price zones for Europe.