Determining optimal interconnection capacity on the basis of hourly demand and supply functions of electricity

Authors

Jan Horst Keppler, William Meunier, Alexandre Coquentin

Abstract

Interconnections for cross-border electricity flows are at the heart of the project to create a common European electricity market. At the time, increase in production from variable renewables clustered during a limited numbers of hours reduces the availability of existing transport infrastructures. This calls for higher levels of optimal interconnection capacity than in the past. In complement to existing scenario-building exercises such as the TYNDP that respond to the challenge of determining optimal levels of infrastructure provision, the present paper proposes a new empirically-based methodology to perform Cost-Benefit analysis for the determination of optimal interconnection capacity, using as an example the French-German cross-border trade. Using a very fine dataset of hourly supply and demand curves (aggregated auction curves) for the year 2014 from the EPEX Spot market, it constructs linearized net export (NEC) and net import demand curves (NIDC) for both countries. This allows assessing hour by hour the welfare impacts for incremental increases in interconnection capacity. Summing these welfare increases over the 8 760 hours of the year, this provides the annual total for each step increase of interconnection capacity. Confronting welfare benefits with the annual cost of augmenting interconnection capacity indicated the socially optimal increase in interconnection capacity between France and Germany on the basis of empirical market micro-data