Abstract

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. I enumerate the impacts of the first major increase in transmission capacity in decades across the Spain - France border, a notorious and persistent bottleneck in the European transmission network. Hourly electricity flows between the two countries double following the line opening compared to 1,000 MWh before the expansion. The new interconnection decreases the absolute value of price differences between Spain and France by 5 Euros per MWh, from a baseline of 15 Euros per MWh. The resulting aggregate benefits amount to 93 million Euros per year, compared to the investment cost of 700 million Euros. However, changes in buyer expenditures and generator profits provide mixed evidence of incentives to build the line. Generator profits and buyer expenditures do not change in Spain. In France, both generator profits and buyer expenditures increase following the line commissioning. Consequently, despite substantial aggregate benefits not all stakeholders benefit from the transmission expansion, demonstrating the need to consider the distribution of transmission expansion benefits in addition aggregate impacts.