Cooperation and regulation for building electric interconnectors
The gains from investing in electric interconnection depend on the reinforcement of national transmission infrastructure. Because most of the pieces of interconnected grids are complementary, a lack of coordination in the investment decisions made by transmission operators within their limited jurisdiction results in investment below first best levels in both the interconnector and national infrastructure. A subsidy to financially sustain the interconnector building is not sufficient to restore first best. To reach optimal investment without merging the two TSOs into an international operator that would internalize all the effects from its investment, we need a compensation to be paid to each TSO for the positive externality its internal investment creates abroad. This is feasible only if a regulatory agency is empowered with a say in the design and financing not only of the interconnector but also of the domestic lines.