Modeling the Cost of Achieving a Renewable Energy Target: Does it Pay to Cooperate Across Borders?

Abstract

Electricity markets are increasingly integrated across borders, but transmission and renewable energy policies often remain local and uncoordinated. In this paper, we analyze how cooperative behavior in developing renewable energy technologies across borders and/or cross-border transmission capacity investment can reduce the cost of achieving a renewable energy target. We use a three step equilibrium model with: i) transmission investment, ii) generation investment and iii) electricity market that we apply to an interconnected two zone system. We find that it pays to cooperate if the zones have different renewable energy sources, but the success of a renewable energy cooperation also depends on cooperation in transmission development, which is therefore an important interaction to take into account in renewable energy policy discussions.