Cross-border cost allocation: application of beneficiary pays principle to electricity transmission investments

Massive electricity transmission investments are needed to achieve the energy and climate policy objectives of the European Union. The alignment of national and European interests remains the key challenge behind the realization of these investments. This thesis contributes to the design of efficient cross-border cost allocation solution as one of the regulatory tools that can play a significant role in aligning these interests. Trends in practice indicate the application of beneficiary pays principle to solve the cost allocation problem. Within the academic circle, this has been the long standing core principle of solving cost allocation problems. However, its application to cross-border electricity transmission investments with a strong national decision-making power is not widely studied. This thesis reviews various cost allocation methods to check their suitability to apply this principle. The findings indicate that these methods leave open questions regarding which benefit indicators to use for allocating the investment cost and how compensation issues are handled. Therefore, a framework to apply the beneficiary pays principle is required. Introducing transmission investments from a welfare analysis perspective, the thesis develops a framework to apply the beneficiary pays principle to solve the cost allocation problem. An important element of this framework is the use of congestion revenue as part of the solution. The design involves using congestion revenue in a compensation logic to ensure voluntary cooperation among participating countries. The designed framework is then applied in the context of two important developments in transmission investments in Europe: Projects of Common Interest (PCI) and offshore wind interconnection projects. The results show that the framework can help align national and European interests in projects with European relevance. Moreover, important implementation issues are identified