The integration of electrical systems through cross-border interconnections is transforming global energy trade. These connections allow for bidirectional electricity flow between markets with different regulatory structures, enhancing energy security and facilitating the adoption of renewable sources. However, their implementation and management present complexities that require a specialized approach.

According to the report by the Oxford Institute for Energy Studies, heterogeneous interconnections face unique challenges. Regulated markets, for example, often have an informational advantage over liberalized ones, which can create imbalances and reduce efficiency in infrastructure use.

Furthermore, designing appropriate mechanisms for capacity allocation is crucial to ensuring the full utilization of these connections. Without strategic planning, the potential of interconnections could be wasted, limiting their capacity to promote renewable integration and improve energy trade.

Adapted mechanisms for diverse contexts

Heterogeneous interconnections, such as Morocco-Spain, Turkey-Georgia, and Quebec-Ontario, illustrate how capacity allocation mechanisms vary according to the characteristics of the involved markets. In the case of Morocco-Spain, capacity is managed through a combination of implicit auctions and bilateral contracts. This approach offers some flexibility, although the lack of clear mechanisms for congestion rent sharing presents significant barriers. On the other hand, the Turkey-Georgia interconnection prioritizes direct contracts and explicit auctions, with a particular focus on allocating capacity for renewable energy, ensuring preferential access for green generators.

In Quebec-Ontario, a hybrid model has been implemented that combines virtual markets and long-term contracts, optimizing seasonal differences in electricity demand. This strategy leverages Quebec’s hydroelectric capacity and Ontario’s liberalized structure to maximize mutual benefits. According to the report, “the design of mechanisms must adapt to the peculiarities of heterogeneous markets,” highlighting the need for clear rules and regulatory frameworks that promote cooperation between interconnected markets.

The European Union’s experience: a model to follow

In Europe, electrical interconnections have become central to the energy strategy. The European Commission has set a 15% interconnection target for 2030 to improve the connection of national electrical systems and promote cross-border energy trade. This goal aims not only to ensure supply security but also to better integrate variable renewable energies such as solar and wind into European markets. This allows excess energy produced in one country to be used in another where demand is higher, reducing the risk of blackouts and enhancing the stability of electrical systems.

The European Commission emphasizes that “each new interconnector must undergo a socio-economic and environmental cost-benefit analysis,” ensuring that the potential benefits outweigh investment costs. This approach has been key in fostering public acceptance of projects and ensuring their long-term sustainability. The European experience demonstrates how clear regulatory frameworks and common objectives can facilitate cooperation between countries and maximize the positive impact of interconnections.

Global benefits and challenges

Heterogeneous interconnections offer significant benefits for global energy markets. These connections enable better utilization of renewable resources, transferring excess energy to regions with high demand, and reduce the need to build new power plants, optimizing existing infrastructure. Moreover, they contribute to energy security by ensuring supply during extreme weather events or local generation failures.

However, the challenges are not minor. According to the Oxford report, regulated markets may exploit their informational advantage to manipulate prices, reducing the overall efficiency of interconnections and limiting their benefits. Additionally, a lack of transparency and cooperation among system operators can lead to inefficiencies, as seen in the Morocco-Spain interconnection, where regulatory limitations hinder the participation of external agents. This case highlights the importance of establishing clear legal frameworks and fostering competition to maximize the positive impact of these infrastructures.

Recommendations for an interconnected energy future

To overcome the challenges associated with heterogeneous interconnections, the Oxford Institute for Energy Studies report proposes several key strategies. First, decentralizing exchange decisions is crucial, allowing private agents to participate and promoting transparency in the process. Additionally, long-term contracts that guarantee minimum utilization levels should be implemented to ensure a constant flow of electricity between markets.

The European experience underscores the importance of setting clear interconnection objectives, accompanied by indicators that reflect both the urgency of action and the socio-economic impact of investments. “The key is to balance economic efficiency with equity between markets,” concludes the report, emphasizing the need to design solutions that benefit both regulated and liberalized markets.