Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1394: National Transmission System Operators in an International Electricity Market

Henrik Horn () and Thomas Tangerås ()
Additional contact information
Henrik Horn: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Thomas Tangerås: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

Abstract: This paper develops a framework for analyzing the incentives of national transmission system operators (TSOs) to supply cross-border interconnection capacity in an international electricity market. Our results show that equilibrium transmission capacity is downward distorted, even in situations where full capacity utilization is inefficient. We derive a method for quantifying these distortions and propose a market design that uniquely implements efficient dispatch of electricity. In this design, the distribution of trade adjustment payments causes TSOs to internalize the full e¤ect of network congestion. The design would improve, for instance, on the current European market design.

Keywords: International electricity market; Market design; Market power; Network congestion

JEL-codes: F12; F15; L43; L94; Q27; Q41

41 pages, June 21, 2021

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