Development scenarios for the North and Baltic Seas Grid – A welfare economic analysis

•The paper provides a framework for the analysis of cross-country electricity networks.•We develop three idealtype scenarios: i) status quo; ii) trade, iii) meshed network.•The model is applied to the North and Baltic Seas Grid (NW-Europe).•Overall welfare increases in the scenarios, but some countries may also loose rents.•Focusing on a specific grid design at this point in time appears to be immature.

The North and Baltic Seas Grid is one of the largest pan-European infrastructure projects, increasing the potential of harnessing large amounts of renewable energy. This paper addresses the economic implications of different development scenarios of the North and Baltic Seas Grid on individual countries and stakeholders which may raise concerns about the implementation in largely nationally dominated regulatory regimes. The paper develops three scenarios and quantifies the technical-economic effects: i) the status quo, in which engagement in the North and Baltic Seas is largely nationally driven; ii) a trade scenario dominated by bilateral contracts and point-to-point connections; and iii) a meshed network scenario of fully interconnected cables crossing both the North Sea and the Baltic Seas making a truly pan-European infrastructure. We find that in terms of overall welfare, the meshed solution is superior; however, from a distributional perspective there are losers in such a scheme, namely the incumbent electricity generating firms in France, Germany, and Poland, as well as the consumers in low-price countries, e.g. Norway and Sweden. Merchant transmission financing, based on congestion rents only, does not seem to be a sustainable option to provide sufficient network capacities, and authorities will need to mandate the investment in order for it to be made. We also find strong interdependencies between offshore grid expansion and the subsequent onshore network.