Michael Giberson
Tres Amigas is a proposed project to link the Eastern Interconnection, Western Interconnection, and the Texas Interconnection (ERCOT) by means of a high-tech three-way superconducting AC-DC-AC connection. You might wonder what economics has to say about such an unprecedented and innovative proposal.
Consider this summary from Ralph Turvey, “Interconnector Economics,” Energy Policy, 34 (2006) 1457–1472:
Interconnectors yield undoubted benefits, but whether their likely level would justify their probable cost is in most cases subject to great uncertainty. Benefits from an existing interconnector could be maximised if a single system operator was responsible for both unit commitment and dispatch in the connected areas. But when there is no such single operator, securing optimal utilisation of an interconnector presents great difficulties, even with a single DC link, as the phenomenon of two-way nominations attests. The vastly more complex problem of achieving an approximation to optimal use of multiple AC links raises additional difficulties….
In the Tres Amigas case we can rule out the idea of “a single system operator responsible for both unit commitment and dispatch in the connected areas.” Theoretically ideal. Ain’t gonna happen.
Fortunately, it is possible to approach that ideal by implementation of concepts like “virtual regional dispatch.” Turns out that VRD has been a tough sell even in cases like New York ISO and ISO New England where it seems to make a lot of sense. At least the Tres Amigas proposal doesn’t rise to the level of a “vastly more complex problem of … multiple AC links.” And besides, we don’t need to attain optimal in order to capture a worthwhile amount of gains from trade.
Here’s another related article, Laura Malaguzzi Valeri, “Welfare and competition effects of electricity interconnection between Ireland and Great Britain,” Energy Policy, 37 (2009), Pages 4679-4688. From the abstract:
… Social welfare increases with interconnection, although at a decreasing rate. As the amount of interconnection increases, there are also positive effects on competition in Ireland, the less competitive of the two markets. Finally, it is unlikely that private investors will pay for the optimal amount of interconnection since their returns are significantly smaller than the total social benefit of interconnection.