An Efficient Mechanism for Cross-border Support of Renewable Electricity in the European Union

Busch, S., Nakicenovic, N. ORCID: https://orcid.org/0000-0001-7176-4604, Ortner, A., & Bedard, N. (2015). An Efficient Mechanism for Cross-border Support of Renewable Electricity in the European Union. In: Systems Analysis 2015 - A Conference in Celebration of Howard Raiffa, 11 -13 November, 2015, Laxenburg, Austria.

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Abstract

The ability to exchange renewable electricity (RES-e) capacity between EU member states improves the welfare of all member states since potentials and demands for RES-e capacity vary across the EU. This notion is reflected in the promotion of so-called cooperation mechanisms by the European Commission. The existing mechanisms appear, unfortunately, to be insufficient to facilitate an efficient level of trade in capacity across the EU; only a small quantity of energy is expected to be subject to cooperation mechanisms (Klessmann et al. 2010). In order to address these challenges, in this paper we propose a new mechanism for cross-border support of renewable electricity in EU. The guiding idea is that the cross-border mechanism allocates new RES-e generating capacity across EU Member States to where it is most valuable. This can, but need not, coincide with the most cost efficient allocation. The mechanism consists of two main elements. Firstly, a cross-border impact matrix that indicates the spill-over of benefits between member states induced from the power injection of additional RES-e generating capacity. Secondly, an EU wide auction in which member states and generators of RES-e bid prices indicating their willingness to pay for additional RES-e generating capacity. Then for given parameters the auctioneer selects the set of bids that maximizes an EU-wide surplus. We find that the mechanism leads to a decentralized optimization of RES-e support in the EU, by matching high willingness to pay of member states with low cost potentials of RES-e generation, but only if the benefits of RES-e are actually delivered for the member state paying for it. Moreover, the mechanism offers the potential to significantly reduce the barriers of the current cooperation mechanism, such as transaction costs or uncertainty about costs and benefits.

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