Market Design for Long-Distance Trade in Renewable Electricity

While the 2009 EU Renewables Directive allows countries to purchase some of their obligation from another member state, no country has yet done so, preferring to invest locally even where load factors are very low. If countries specialised in renewables most suited to their own endowments and expanded international trade, we estimate that system costs in 2030 could be reduced by 5%, or Sic 15 billion a year, after allowing for the costs of extra transmission capacity, peaking generation and balancing operations needed to maintain electrical feasibility. Significant barriers must be overcome to unlock these savings. Countries that produce more renewable power should be compensated for the extra cost through tradable certificates, while those that buy from abroad will want to know that the power can be imported when needed. Financial Transmission Rights could offer companies investing abroad confidence that the power can be delivered to their consumers. They would hedge short-term fluctuations in prices and operate much more flexibly than the existing system of physical point-to-point rights on inter-connectors. Using FTRs to generate revenue for transmission expansion could produce perverse incentives to under-invest and raise their prices, so revenues from FTRs should instead be offset against payments under the existing ENTSO-E compensation scheme for transit flows. FTRs could also facilitate cross-border participation in capacity markets, which are likely to be needed to reduce risks for the extra peaking plants required.