Newbery, D., Castagneto Gissey, G., Guo, B. and Dodds, P. E.

The private and social value of British electrical interconnectors

Energy Policy

Vol. 133 pp. 1-37: 110896

Abstract: Interconnectors have value for Britain, providing access to cheaper Continental power, security of supply, and managing increased renewables, prompting proposals for substantial new interconnectors. The EU Target Electricity Model requires interconnector market coupling via Day Ahead and IntraDay Markets. We examine the efficiency and value of uncoupled and coupled trading for the four DC interconnectors to GB, over different timescales from year ahead to intraday, and the social costs and benefits not reflected in the private benefits. Because the GB carbon tax is not replicated abroad it transfers some €65 m./yr to the foreign interconnector part-owners and creates distortions when trade flows change. IFA and BritNed have a commercial value of about €500 million/yr, create additional infra-marginal surplus of €25 m./yr, but suffer €30 m./yr deadweight loss from the asymmetric GB carbon tax. The island of Ireland was coupled in Oct 2018, dramatically reducing trading inefficiency. While further investment in interconnectors appears socially profitable, it is important to harmonise carbon taxes across the EU. If GB leaves the EU and is uncoupled, some of these trading gains would be sacrificed, but other financial markets may alleviate the cost of Brexit, making policies to enhance liquidity desirable.

Keywords: Interconnectors, Market coupling, Hedging, Social value

JEL Codes: C54, D40, D44, F14, D47, H23, L94, Q48

Author links: David Newbery  

Publisher's Link: https://doi.org/10.1016/j.enpol.2019.110896