Welfare compensation in international transmission expansion planning under uncertainty

In international power systems, a proposed cross-country transmission cable that is beneficial to the system as a whole can be detrimental to the economic welfare of a specific country. If this country is one of the countries hosting the cable, it has the ability to veto the investment, thereby harming the system as a whole. To counter this issue, welfare compensations have been proposed in the literature that compensate a country’s expected welfare loss. However, the actual welfare effects of a new cable are uncertain and there is no guarantee that a compensation scheme based on expected welfare effects is sufficient to compensate for the actual, realized welfare effects. This paper investigates the potential of different mechanisms to compensate the realized welfare effects of a new transmission cable. Two novel mechanisms based on the realized flow through the new cable are proposed, and compared with mechanisms from the literature that are based on expected welfare gains. Using a case study of a cable between Norway and Germany, the performance of the various compensation mechanisms is numerically assessed. The results suggest that the novel flow-based mechanisms can mitigate negative welfare effects and reduce risk, making investments more attractive.