Electricity across borders regional cost sharing of grid investments, international benchmarking and the electricity demand of an ageing population

Abstract: This thesis deals with issues related to investments and regulation of high-voltage electricity grids, and to the households’ demand for electricity. The thesis consists of four self-contained papers. Papers I and II address the challenge of reaching agreements on the expansions of electricity grid infrastructure across national borders. Agreements can be problematic to reach due to regional welfare-effects from new infrastructure, which leads to questions of how investment costs should be shared and under what circumstances cooperation will be rational for all nations. This relates to both the allocation rule used, and the number of countries involved in the sharing (e.g., bilateral or regional). These issues are analysed by game theoretic methods and a numerical optimisation model of the electricity systems of six European countries. Results show that proportional sharing of investment costs in relation to benefits is the most practical solution, and that it also gives outcomes in terms of welfare and transmission capacity that are very close to the regional welfare optimum. The utilities responsible for the transmission system operation and the grid development are the national Transmission System Operators (TSO). The TSOs are monopoly utilities that operate under regulatory oversight. The absence of competition in this sector means that regulators have an important role in monitoring performance and ensuring overall efficiency. One way to do this is by frontier benchmarking methods. However, there are in general no national comparators for TSO, which means that performance needs to be measured against international comparators. Paper III applies a benchmark model to analyse the technical efficiency of 29 European TSO. Data envelopment analysis (DEA) is used to estimate efficiency scores and different approaches to account for the heterogeneity in operating environments are tested. Results show that the average technical efficiency is between 88% and 94%, depending on model and data sample. While this indicates that there are efficiency differences between the TSOs, the extension to regulation of TSOs is not straight forward since the reasons for inefficiency may be due to factors that are outside the TSO’s control. In Paper IV attention is turned towards the households’ demand for electricity. The question answered is how the ageing populations in OECD countries, and the consequential changes in population age-structures, may affect the residential demand for electricity. The implications of changing demography is analysed by a family life-cycle model, and an empirical analysis is made by specifying an econometric model of electricity demand that includes the population age-structure by four age-group variables. Results show that the oldest age-group has the largest positive effect on aggregate per capita consumption, while the other groups have lower but similar effects. The results have implications for projections of future electricity demand and for policies aimed at influencing households’ electricity demand, not the least since the share of elderly in the populations of western societies will increase by several percentage points over the coming decades.