Three Essays in Energy Economics

Abstract

Efficient operations of the electricity system necessitate the ability to trade large volumes of electricity across vast geographical areas. Since demand and supply of electricity must perfectly match at any given time, wholesale electricity markets need to cover large geographical areas to enable, and reap the full benefits of trade. Integration and connection of renewable electricity generation into the electricity grid to meet climate goals requires investment in high voltage electricity transmission systems. Limited cross-border transmission capacities constrain allocative efficiency gains from expansions of wholesale electricity markets across large geographical areas. Since the electricity transmission system is the only conduit for trade, a transmission line connecting adjacent areas operating at its capacity constrains trade between them, and creates differences in wholesale electricity prices between them. Quantifying and understanding the impacts of increased cross-border transmission capacity on trade volumes, wholesale market prices, and stakeholder surplus is an essential step in designing policy incentivizing market delivered investment in transmission systems. Knowing the benefits of integrated wholesale electricity markets can aid in the pursuit of electricity markets covering entire continents. I enumerate the impacts of major increases in transmission capacity across several European borders. All of the studied investments lead to large increases in cross-border electricity flows, a measure of trade volumes. Furthermore, I show on the example of the border between Spain and France that despite substantial aggregate benefits not all stakeholders benefit from the transmission expansion. Thus, demonstrating the need to consider the distribution of transmission expansion benefits in addition aggregate impacts. I also discuss the creation of a single, European wide day ahead wholesale electricity market.