Working Papers,
Copenhagen Business School, Department of Economics

Abstract: Cross-border interconnection (IC) projects are central to achieving the European Union’s goals of energy market integration, system resilience, and security of supply. However, their implementation often encounters financial and policy challenges stemming from uneven distribution of costs and benefits across the countries and exacerbated jurisdictional differences and information asymmetry. This paper proposes an approach that reorients the current practice of CBCA policy to one that embeds economic theory that informs the project assessment and negotiation process. We present a conceptual framework that integrates bargaining theory and incentive design into the Cross-Border Cost Allocation (CBCA). It considers the joint interests of project promoters, National Regulatory Authorities (NRAs), and the European Commission (EC) when assessing investments and co-funding from the Connecting Europe Facility (CEF). A new role for CEF, not as an ex-post subsidy, but as a directed policy instrument enables elicitation of true values of benefits and incentive-compatible cost allocation that aligns national and EU objectives. We conclude with policy recommendations for enabling implementation of cross-border investments in the EU’s evolving energy grid policy.

Keywords: Electricity grid; Cross-border investment; Cost allocation; Information asymmetry; Energy policy

JEL-codes: C70; D00; L94; Q40

Language: English

17 pages, February 6, 2026

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