From National to Cross-Border Support of Renewable Electricity in the European Union

The ability to cooperate in the expansion of renewable energies has long been recognized as welfare improving. However, the existing cooperation mechanisms introduced in the European Union appear to be insufficient to facilitate an efficient level of trade across borders. In this chapter we focus on the electricity sector and identify several characteristics of the market for renewable electricity support that contribute to this failure. We then propose a novel mechanism for cross-border support of renewable electricity capacity that addresses these failures in two steps: First, a cross-border impact factor is derived that provides an approximate indication of the spillover of benefits induced from renewable electricity capacity across the member states of the European Union. Second, a cross-border auction in which member states and generators of renewable electricity bid to either buy or supply additional renewable electricity capacity. The auctioneer uses the cross-border impact factor to determine the aggregate cross-border willingness to pay for additional renewable electricity capacity in each member state and selects the set of bids, which maximizes the EU-wide surplus. Inevitably, the design of the mechanism uses a simplified representation of the underlying system ‘reality’ in order to achieve the complexity reduction needed to create a ‘level playing field’, but in our view it would still represent cross-border impacts accurately enough to spur efficiency improvements in the right direction. Moreover, the fact that it could be integrated into the emerging market and regulatory framework in the European Union fairly easily is appealing.