National-strategic investment in European power transmission capacity

• Published in: European journal of operational research 2015-11, Vol.247 (1), p.191-203
• Main Authors: Huppmann, Daniel, Egerer, Jonas
• Format: Article
• Language: English
• Subjects: Cost benefit analysis; Cross border transactions; Electricity distribution; Electricity transmission; Expansion; Game theory; Generalized Nash equilibrium (GNE); Investments; Jurisdiction; Mixed-integer equilibrium problem under equilibrium constraints (MI-EPEC); Network expansion; Studies
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2015.05.056

•We formulate a three-stage equilibrium model for strategic network investment.•Zonal regulators upgrade domestic power lines to shift welfare towards their constituents.•The failure to reach the first-best investment is illustrated using a four-node network.•We propose a variation of disjunctive constraints to solve GNE/EPEC-type problems.•This approach does not require a priori assumptions on the valuation of shared constraints. The transformation of the European electricity system requires substantial investment in transmission capacity to facilitate cross-border trade and to efficiently integrate renewable energy sources. However, network planning in the EU is still mainly a national prerogative. In contrast to other studies aiming to identify the pan-European (continental) welfare-optimal transmission expansion, we investigate the impact of zonal planners deciding on network investment strategically, with the aim of maximizing the sum of consumer surplus, generator profits and congestion rents in their jurisdiction. This reflects the inadequacy of current mechanisms to compensate for welfare re-allocations across national boundaries arising from network upgrades. We propose a three-stage equilibrium model to describe the Nash game between zonal planners (i.e., national governments, regulators, or system operators), each taking into account the impact of network expansion on the electricity spot market and the resulting welfare effects on the constituents within its jurisdiction. We propose a novel way to solve the resulting GNE/EPEC-type problem using a variation of a disjunctive constraints reformulation. This allows to solve this problem without a priori assumptions on the relative valuation of shared constraints by each player. Using a four-node sample network, we identify several Nash equilibria of the game between the zonal planners. This example illustrates the failure to reach the first-best welfare expansion in the absence of an effective framework for cross-border cost-benefit allocation.