Integrating Power Systems across Borders

Since the earliest days of their development, power systems have run up against, and then across, jurisdictional boundaries. A primary driver of this expansion has been economics, in particular a desire to lower the overall investment and operating costs of the power systems in question. At the same time, cross-border power system integration can bring with it a number of security benefits. More recently, a third driver of cross-border system integration has become more relevant: the integration of increasing shares of variable renewable energy (VRE) sources.

As a starting point, though, it is important to note that there is no single model for cross-border power system integration. However, it is possible to categorise cross-border integration efforts according to the mode and degree of integration.

The International Energy Agency (IEA) has identified three main modes of cross-border integration: bilateral, multilateral and unified.

Within these modes, multiple categories may be defined. For example, bilateral trades may be unidirectional, may involve intermediaries or may be bidirectional in nature.

Multilateral models are generally supported by regional institutions, but individual jurisdictions may still organise their own local markets and retain full control over system operations. This model may involve differentiated (i.e. mixed) market structures, or might only include jurisdictions with harmonised market structures. Finally, unified models centralise market organisation, and possibly system operations as well, across jurisdictions in a regional institution.

Cross-border integration has implications for the economics, security and environmental impact of power systems. In many cases the implications are positive, lowering costs, increasing security and lowering the environmental impact of operations. However, integration also brings with it economic and security challenges, some of which relate directly to the environmental benefits.

Benefits of integration

From an economic perspective, expanding power systems across borders allows developers and market participants to take advantage of economies of scale on both the supply and demand sides, enabling the development of larger resources and access to cheaper supply sources.

The security benefits derive primarily from the fact that larger power systems are more diverse in terms of both supply and demand. They therefore require relatively fewer resources to meet peak demand needs, allow for the sharing of reserves between jurisdictions and increase overall system security by increasing the diversity of available resources.

Finally, the environmental benefits of cross-border integration derive primarily from the fact that larger power systems are able to integrate higher shares of variable renewables. This is because with larger balancing areas there is a natural smoothing of the underlying resource (e.g.the wind blows and the sun shines with different levels of intensity across large geographic areas). Cross-border power system integration can also increase access to flexible resources, including from the interconnectors themselves.

Challenges of integration

Though the net benefits of integration have generally been found to be positive, for individual market participants, integration can be challenging. As in any trading arrangement, some groups will benefit more than others, and in some cases the net impact may be negative.

The broader economic challenge for integration, therefore, is how to allocate benefits across market participants. This is the case for both investment costs (in particular, cross-border transmission infrastructure or local infrastructure investments that have cross-border implications) and operational costs.

With regard to security, there are three primary issues that must be addressed. First, individual jurisdictions tend to have an expectation that they should remain self-sufficient – that is, they should not rely on power from neighbouring regions to keep the lights on. The second issue is the fact that the tight coupling of power systems across borders increases the risk of a major blackout, one that starts in one jurisdiction but spills over into interconnected jurisdictions. Finally, interconnected, synchronised systems must deal with unexpected cross-border power flows (often called "loop" or"transit" flows). This is in particular a growing issue in regions with higher shares of variable renewables, which tend to vary significantly as weather patterns shift.

Finally, and related to the above, in interconnected systems local policies have cross-border implications. For example, policies to support local investment in renewables can result in increasing uncoordinated cross-border power flows. Local capacity mechanisms can result in a relative oversupply of capacity in one jurisdiction relative to total system needs. Or phase-out policies can result in a rapidly changing regional resource mix.

This report lays out the key aspects of cross-border power system integration that policy makers and other relevant stakeholders should be aware of. In particular, it focuses on three primary areas to consider: system security, resource adequacy and governance.

Keeping the lights on

System security, simply put, means keeping the lights on. For integrated power systems, this means increased co‑ordination of real-time operations, establishing reliability frameworks, and developing mechanisms for cross-border energy trading.

Real-time operations is the most critical piece. Increased co‑ordination of dispatch across borders can improve the economics of system operations while also improving the overall security of operations. Similarly, co‑ordination on planning and operations is a key way of addressing loop and transit flows. Without such co‑ordination the alternative is to invest in technological solutions such as phase shifters, which limit cross-border power flows, or increased investment in transmission. Here, however, misaligned economic incentives can potentially lead to underinvestment in some regions, and therefore the shifting of investment costs to other regions.

Many integrated jurisdictions have also found benefits to developing harmonised reliability frameworks, including reliability standards and grid codes. Of critical importance in this case are regional co‑ordination and the inclusion of all relevant stakeholders in the development process.

Planning for the long term

Cross-border power system integration starts with the development of cross-border interconnectors. As with any transmission project, interconnector development can take many years and will involve multiple stakeholders. The involvement of multiple jurisdictions complicates things further by necessitating some degree of regional planning and agreements on how to share investment costs. Ideally, regional planning should look at overall regional resource adequacy, while cost sharing should be done according to a "beneficiary pays" principle, where the costs are shared in proportion to each party's received benefits.

Once interconnectors are in place, it is important to agree on how to measure and allocate interconnector capacity. Ideally, all parties should agree on a common calculation methodology, and interconnector capacity should be allocated across multiple time frames to ensure reliable access over time, but also to enable the optimal utilisation of interconnector capacity in real time. Effective allocation of interconnector capacity is also critical for jurisdictions that wish to trade capacity products (as opposed to energy products) across borders.

Governance

Looking across all of the elements highlighted above, a common element emerges: the need for increased cross-border co‑ordination. This co‑ordination is best enabled through governing institutions and regional market frameworks.

As a starting point it is important to note that in inter-jurisdictional integration, political institutions have a key role to play, both in enabling integration in the first place and supporting overall co‑ordination. Regulatory institutions are also key, as they determine the rules for operations to ensure reliability and to allow local market participants to benefit fully from the gains of trade. Finally, market frameworks are necessary to enable trade. How these market frameworks look in practice, however, depends significantly on the underlying market structures of the interconnected jurisdictions.

If there is a single key lesson for the governance of cross-border power system integration, though, it is this: regional integration is best enabled by the presence of regional institutions. The role and level of authority of these institutions may vary, but all of the examples highlighted in this report have some form of regional institution in place.

Efforts at cross-border integration exist across the globe. Therefore, the primary question is not whether jurisdictions should integrate their power systems across borders, but how they should. To enable the secure and economic integration of power systems, policy makers should support inter-jurisdictional collaboration across a wide range of areas. In particular, the areas of system operations, long-term planning and governance require collaboration. In all cases, the role of regional institutions is critical. Importantly, it is possible to integrate power systems across borders without sacrificing local autonomy, though some balance between regional and local priorities is necessary to realise the full benefits of cross-border integration.

Since the earliest days of their development, power systems have run up against, and then across, jurisdictional boundaries. A primary driver of this expansion has been economics, in particular a desire to lower the overall investment and operating costs of the power systems in question. At the same time, cross-border power system integration can bring with it a number of security benefits. More recently, a third driver of cross-border system integration has become more relevant: the integration of increasing shares of variable renewable energy sources.

The act of cross-border power system integration can involve a wide range of elements, including, but not necessarily limited to: co‑operation on system planning; grid synchronisation; co‑ordination of system operations; integration of electricity markets; and harmonisation (or consolidation) of policies and regulation. Broadly speaking, these elements fall into three categories: system operations, or managing integrated power systems in real time; resource adequacy, or ensuring sufficient long-term investment in transmission and generation; and governance, which includes policies, regulations and institutions.

What does "across borders" mean?

The primary focus of this study is on jurisdictional borders. This means the boundaries of decision making. This includes borders across which decision-making authorities are clearly defined, such as between countries, and borders for which the division of responsibilities between decision-making authorities is at times less clear. In practice, different jurisdictional borders may overlap with one another. The presence of, and interactions across, these jurisdictional boundaries are the key elements that differentiate cross-border power system integration from other power sector activities.

Multiple modes of power system integration exist

There is no single model for cross-border power system integration. However, it is possible to categorise cross-border integration efforts according to the mode and degree of integration.

There are two main ways to look at cross-border integration. One is as existing across a spectrum from limited integration to complete integration. The second is temporarily, along a spectrum ranging from long-term to short-term.

Figure 1 shows examples of cross-border integration that extend from limited (bilateral, unidirectional power trades) to complete (unified market and operations). Taken together, they can be considered a kind of hierarchy. The greater the degree of integration, the greater the potential benefits – but also the greater the complexity of organisation.

Figure 1. A hierarchy of integration: From limited to complete

This hierarchy of integration can be subdivided into three main groups: bilateral, multilateral, and unified. Under bilateral integration, trades occur between only two jurisdictions. In some cases these trades may be unidirectional, and in other cases there may be intermediary transit (or wheeling) jurisdictions that transfer flows of power, but are otherwise uninvolved in the transaction.

Multilateral modes of integration involve three or more jurisdictions that can trade among one another. Underlying market structures within the jurisdictions can vary. In all cases, however, integration is supported through the development of regional institutions that help co‑ordinate or manage, but do not replace, local institutions.

Finally, under unified models of integration, regional institutions take on some or all of the responsibilities for managing the power system across multiple jurisdictions, including at least market organisation, and possibly even system operations.

From a temporal perspective, cross-border integration can involve collaboration that occurs over long time horizons, such as long-term system planning or power purchase agreements, or short time horizons, such as ancillary services and real-time dispatch. Between those two extremes are areas that may be governed by market arrangements or inter-regional operating agreements, such as the sharing of short-term forecasts or information on day-ahead scheduling. This spectrum of integration is outlined in Figure 2.

Figure 2. A spectrum of integration: From long-term to short-term

As with the hierarchy of limited to completed integration, the hierarchy of long-term to short-term integration does not imply a natural evolution. In practice, many cross-border integration efforts do start with increased collaboration of long-term system planning, and these may lead to collaboration on, for example, the development of regional day-ahead markets. It is also possible, however, to find examples of integration that start with a focus on short-term markets. More importantly, these types of integration are not mutually exclusive. In fact, typically multiple modes of integration exist simultaneously.

Integration has economic, security and environmental implications

Cross-border integration has implications for the economics, security and environmental impact of power systems. In many cases, the implications are positive, lowering costs, increasing security and lowering the environmental impact of operations. However, integration also brings with it economic and security challenges, some of which relate directly to the environmental benefits.

From an economic perspective, expanding power systems across borders allows developers and market participants to take advantage of economies of scale on both the supply and demand sides, enabling the development of larger resources and access to cheaper supply sources.

The security benefits derive primarily from the fact that larger power systems are more diverse in terms of both supply and demand. They therefore require relatively fewer resources to meet peak demand needs, allow for the sharing of reserves between jurisdictions and increase overall system security by increasing the diversity of available resources.

Finally, the environmental benefits of cross-border integration derive primarily from the fact that larger power systems are able to integrate higher shares of variable renewables. This is because with larger balancing areas there is a natural smoothing of the underlying resource (e.g.the wind blows and the sun shines with different levels of intensity across large geographic areas). Cross-border power system integration can also increase access to flexible resources, including from the interconnectors themselves.

Though the net benefits of integration have generally been found to be positive, for individual market participants, integration can be challenging. As in any trading arrangement, some groups will benefit more than others, and in some cases, the overall impact may be negative.

The broader economic challenge for integration, therefore, is how to allocate benefits across market participants. This is the case both for investment costs (in particular, cross-border transmission infrastructure or local infrastructure investments that have cross-border implications) and operational costs.

With regard to security, three primary issues must be addressed. First, individual jurisdictions tend to have an expectation that they should remain self-sufficient – that is, they should not rely on power from neighbouring regions to keep the lights on. The second issue is the fact that the tight coupling of power systems across borders increases the risk of a major blackout, one that starts in one jurisdiction but spills over into interconnected jurisdictions. Finally, interconnected, synchronised systems must deal with unexpected cross-border power flows (often called "loop" or "transit" flows). This is in particular a growing issue in regions with higher shares of variable renewables, which tend to vary significantly as weather patterns shift.

Finally, and related to the above, in interconnected systems local policies have cross-border implications. For example, policies to support local investment in renewables can result in increasing uncoordinated cross-border power flows. Local capacity mechanisms can result in a relative oversupply of capacity in one jurisdiction relative to total system needs. Alternatively, phase-out policies can result in a rapidly changing regional resource mix.

System security, simply put, means keeping the lights on. For integrated power systems, this means increased co‑ordination of real-time operations, establishing reliability frameworks and developing mechanisms for cross-border energy trading.

Real-time operations is the most critical piece. Increased co‑ordination of dispatch across borders can improve the economics of system operations while also improving the overall security of operations. Figure 3, for example, shows how the transmission system operators (TSOs) in the Nordic countries collaborate to utilise reserve generation in real time.

Figure 3. Example reserve activation between two Nordic TSOs

Two key elements to this interaction are important to highlight. First, each of the TSOs retains full control over its power system. If, for example, Denmark wishes to activate a reserve resource in Sweden, it must make the request to the Swedish TSO, which then makes the actual operation decision. Second, this works only because there the TSOs share information with one another ahead of time (in particular, information on the cost and availability of their reserve resources) and because they have a communication plan in place that allows the request to be made.

Co‑ordination on planning and operations is a key way of addressing loop and transit flows, or unscheduled flows of electricity across borders. Without such co‑ordination, the alternative is to invest in technological solutions such as phase shifters, which limit cross-border power flows, or increased investment in transmission. Here, however, misaligned economic incentives can potentially lead to underinvestment in some regions, and therefore the shifting of investment costs to other regions.

Many integrated jurisdictions have also found benefits to developing harmonised reliability frameworks, including reliability standards and grid codes. Of critical importance in this case are regional co‑ordination and the inclusion of all relevant stakeholders in the development process.

Cross-border power system integration starts with the development of cross-border interconnectors. As with any transmission project, interconnector development can take many years and will involve multiple stakeholders.

The involvement of multiple jurisdictions complicates things further by necessitating some degree of regional planning and agreements on how to share investment costs. Ideally, regional planning should look at overall regional resource adequacy. This requires the aggregation of local power system development plans into regional plans, which in turn requires agreements over underlying assumptions, time frames of analysis and potential future scenarios.

Here again, having some regional institution take responsibility for these efforts can be helpful. In Europe, the European Network of Transmission System Operators for Electricity (ENTSO-E) has been assigned the responsibility for developing Europe-wide ten-year network development plans, which it does on a regular basis with the involvement of all relevant TSOs. In the United States, by contrast, there is no single entity with responsibility for developing regional plans. As a result, regional planning exercises tend to be done on a more ad-hoc basis.

Cost sharing of cross-border transmission lines should ideally be done according to a "beneficiary pays" principle, where the costs are shared in proportion to each party's received benefits. Modelling (supported by a common and agreed-upon set of assumptions) is again critical. In practice, however, the identification and sharing of benefits can be challenging. In such cases, it may make more sense to divide costs along lines that are based more on political agreement than economic efficiency. It may also be the case that the benefits are real but too diffuse to fully capture. In that case, regional institutions may step in to support their development through grants or other financial incentives.

Once interconnectors are in place, it is important to agree on how to measure and allocate interconnector capacity. Ideally, all parties should agree on a common calculation methodology, and interconnector capacity should be allocated across multiple time frames to ensure reliable access over time, but also to enable the optimal utilisation of interconnector capacity in real time. Effective allocation of interconnector capacity is also critical for jurisdictions that wish to trade capacity products (as opposed to energy products) across borders.

Looking across all of the elements highlighted above, a common element emerges: the need for increased cross-border co‑ordination. This co‑ordination is best enabled through governing institutions and regional market frameworks.

There are many models of inter-jurisdictional governance arrangements, which may be thought of as existing across a spectrum. At one end, jurisdictions remain independent, and cross-border integration is managed through a set of harmonised bi- or multilateral institutional and policy arrangements (Figure 4). This enables trade without sacrificing local independence over key policies.  At the other end, a single governance framework is developed that encompasses all relevant jurisdictions. Independence is sacrificed in order to increase overall efficiency of trading and system operations.

Figure 4. Models of cross-border integration: From harmonisation to unification

Regardless of the model of governance, political institutions have a key role to play, both in enabling integration in the first place and supporting overall co‑ordination. Without political support, cross-border integration is unlikely to occur.

Regulatory institutions are also key, as they determine the rules for operations to ensure reliability and to allow local market participants to benefit fully from the gains of trade. In many cases, cross-border integration is best supported by the development of regional regulatory institutions, which work with, or, in the extreme case, replace local regulatory institutions.

Finally, market frameworks are necessary to enable trade. How these market frameworks look in practice, however, depends significantly on the underlying market structures of the interconnected jurisdictions. Market frameworks can be simple, for example bilateral contracts for imported power. Alternatively, frameworks can be complex, including the development of regional power markets that allow for multilateral trading. The first option allows for simple, predictable power trading, but lacks flexibility. The second option allows for more flexibility and more optimal use of regional resources, but it can also expose local resources to increased competition.

If there is a single key lesson for the governance of cross-border power system integration, though, it is this: regional integration is best enabled by the presence of regional institutions. The role and level authority of these institutions may vary, but all of the examples highlighted in this report have some form of regional institution in place.

Efforts at cross-border integration exist across the globe. Examples can be found among Organisation of Economic Co-operation and Development (OECD) and non-OECD economies, and range from ones that involve deep integration of power systems across borders to ones that involve only simple exchanges of power without an exchange of money.

The primary question, therefore, is not whether jurisdictions should integrate their power systems across borders, but how they should. To enable the secure and economic integration of power systems, policy makers should support inter-jurisdictional collaboration across a wide range of areas. In particular, the areas of system operations, long-term planning and governance require collaboration.

Notably, these areas of collaboration are linked. System operations requires the utilisation of infrastructure built under long-term plans. All forms of collaboration, whether long-term planning or short-term operations, require some form of enabling governance framework to function properly.

If one key element has emerged from the cross-border integration efforts examined in this study, it is that regional institutions have a critical role to play. They enable collaboration and communication, and can step in to provide important services or play key roles when necessary. Importantly, it is possible to integrate power systems across borders without sacrificing local autonomy. It is necessary, however, to strike a balance between regional and local priorities to realise the full benefits of cross-border integration.