Abstract:
Reaping the full benefits from cross-border interconnection typically requires
reinforcement of national networks. When the relevant parts of the
networks are complements, a lack of coordination between national transmission
system operators typically results in investment below optimal levels in
both interconnectors and national infrastructure. A subsidy to financially sustain
interconnector building is not sufficient to restore optimality; indeed, even
when possible, such subsidisation may have to be restrained so as not to encourage
cross-border capacities that will not be fully utilised due to lack of
investment in national systems.