Seminar 28 May, 2014

Cross-Border Trade in Electricity

Abstract

This paper develops an economic theory of cross-border two-way trade in electricity in which regulated electric utilities engage in profitable trading opportunities when they have sufficient reserve capacity. Electricity demand is stochastic. Twoway trade emerges in similarity to models of ‘reciprocal dumping.’ Whereas in those models firms engage in rent-seeking reciprocal market access, in the present model electric utilities simply exploit cost variations in order to enhance economic efficiency through ‘reciprocal load smoothing.’ After deriving estimating equations, the model is tested with cross-border trade data, exports from Canadian provinces to U.S. states. The empirical tests strongly support the theoretical model. Reciprocal load smoothing provides an economically significant rationale for integrating North America’s fragmented interconnections into a continental ‘supergrid.’

Keywords: electricity, international trade

Contacts: Battista Severgnini and Cédric Schneider